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Corporations - Derivative Actions. Binscarth Holdings LP v. Grant Anthony [against third parties]
In Binscarth Holdings LP v. Grant Anthony (Ont CA, 2024) the Ontario Court of Appeal allowed 'derivative action' appeals, which are actions brought by (typically, shareholders but here) limited partners against principles of the (typically, corporations but here) a limited partnership and third parties. The case is useful to get a feel for limited partnerships structuring in modern practice.
Here the court considers derivative actions against third parties:[91] The second issue to address is whether the respondents may bring a derivative action in the name of and on behalf of Binscarth LP against the third parties, Colligan, 186, and 975. The motion judge determined that the narrow fraud exception to the rule in Foss v. Harbottle would not permit the respondents to commence a derivative action against Colligan, 186, and 975. She reasoned that the exception only applied where the alleged wrongdoer controlled the injured entity. As neither Colligan nor 975 had any affiliation with Binscarth LP, the control requirement was not met, and she held, without further commentary, that 186 similarly had no control over Binscarth LP. Accordingly, she dismissed the request for leave to bring a derivative action against those three parties.
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(b) Discussion
[94] As mentioned, in limited partnerships the general partner makes decisions on behalf of the limited partnership. In the Limited Partnership Agreement in this case, this explicitly includes the handling, prosecuting, and settling of claims of Binscarth LP.
[95] A general partner may pursue a third party for wrongs committed against a limited partnership. However, if the general partner chooses not to do so, one must consider what remedies, if any, are available to the limited partners.
[96] As discussed, some courts have held that a derivative action is available in such circumstances. For example, in Henderson, the High Court of England and Wales reasoned that where a general partner refuses to take action to redress a wrong, a conflict of interest between the third-party wrongdoer and the general partner may qualify to permit a derivative action to be pursued. In that case, the taking of proceedings against the third party whom the general partner had declined to pursue because it was in an “irreconcilable conflict of interest” amounted to the “special circumstance” that justified a derivative action: at para. 59.
[97] In Watson, the British Columbia Court of Appeal determined that the rule in Foss v. Harbottle applied to limited partnerships, but refused to strike a derivative claim against a third party because it was not clear and obvious that the fraud exception to the rule did not apply in the case. As the court noted, that exception to the rule applies “where what has been done amounts to fraud and the wrongdoers are themselves in control of the company”: Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No. 2), [1982] 1 All E.R. 354 (Eng. C.A.), at p. 358.
[98] As discussed, in the corporate context, derivative actions, including against third parties, are codified in the OBCA at s. 246 and the CBCA at s. 239.
[99] Unlike with the first issue, where limited partners have a direct cause of action against their general partners for breach of contract or the LPA, there is no similar privity of contract or statutory relationship between limited partners and third parties. Subject to the factual circumstances, there may be an equitable gap where third parties have harmed the limited partnership but, illegitimately, the general partner has refused to seek redress.
[100] In this case, unlike the proposed derivative claims against Binscarth GP and Grant, there is such an equitable gap with respect to some claims against the third parties. As mentioned, the respondents argue that 186 breached its contractual and fiduciary duties, committed the tort of conversion, and was unjustly enriched by paying fees and commissions to itself and to 975 that were prohibited by the Limited Partnership Agreement, the Management Agreement, and statute. 975 allegedly committed the tort of conversion and has been unjustly enriched by receiving improper loans, commissions, and the improper set-off of interest. The respondents state that Colligan unlawfully converted Binscarth LP’s assets to her own use and was negligent and self-serving in her role as project manager of the renovations at the Binscarth home. The respondents also argue that each of Colligan, 186, and 975 participated in, benefitted from, and was unjustly enriched by Grant’s misappropriation and misuse of assets of Binscarth LP.
[101] The appellants and third parties take issue with the respondents’ reliance on the causes of action of knowing assistance and knowing receipt which they say are new theories of liability. The scope of the submissions before the motion judge is unclear. That said, I am of the view that claims of knowing assistance and knowing receipt could be pursued directly by the limited partners in their individual capacities. This court has long held that “[t]hird parties may be liable as ‘constructive trustees’ if they knowingly receive trust property obtained in breach of trust (the ‘knowing receipt’ cases) or if, without receiving trust property, they knowingly assist in its misapplication (the ‘knowing assistance’ cases)”: Gold v. Rosenberg (1995), 1995 CanLII 1256 (ON CA), 129 D.L.R. (4th) 152 (Ont. C.A.), at p. 154, aff’d on other grounds, 1997 CanLII 333 (SCC), [1997] 3 S.C.R. 767; Waxman v. Waxman, 2004 CanLII 39040 (ON CA), 186 O.A.C. 201 (C.A.), at para. 547. This court has extended this doctrine beyond the trust context: see e.g., Harris v. Leikin Group Inc., 2011 ONCA 790, at para. 8. Alberta courts have specifically applied the knowing participation doctrine to third parties who participate in a general partner’s breach of its fiduciary duties to limited partners: see 0738827 B.C. Ltd., at paras. 68-72. It follows that the respondents’ claims framed as knowing assistance and knowing receipt are not derivative in nature and should be pursued directly in proceedings against the general partner.
[102] However, the nature of the other claims proposed to be asserted against the third parties are not so limited and consist of the claims discussed in paragraph 100. With these proposed claims it may be necessary for equity to intervene to allow for a common law derivative action.
[103] If leave to proceed with a derivative action is in principle available, what test should be applied to determine whether leave ought to be granted? Given the limited effectiveness of the common law exceptions to the rule in Foss v. Harbottle, departure from those strict parameters is warranted. Borrowing from the requirements for leave contained in the OBCA and the CBCA, but with some adjustments, I would propose that before granting leave to pursue a derivative action on behalf of and in the name of a limited partnership, the court should be satisfied that: (a) the general partner has refused to pursue a claim against a third party; (b) the limited partner is acting in good faith; and (c) it appears to be in the best interests of the limited partnership that the action be brought.
[104] In considering these elements, a court must be sensitive to the context of a limited partnership, the management role of the general partner, the terms of the limited partnership agreement governing the partners, and the provisions of the LPA. In this regard, factors to consider may include: whether the general partner’s failure to act is unreasonable or in bad faith; the existence of any conflict of interest between the general partner and the proposed third-party defendant; the presence of a strong prima facie case against the third party; and alternative, non-derivative remedies that may be available to the limited partner. These are simply some factors to consider and do not represent an exhaustive list.
[105] In this case, the evidence on some of these issues is somewhat ill-defined. The respondents filed a notice of motion and amended notice of motion seeking leave to bring their derivative action but did not include a draft statement of claim. While Ramsay J. ruled that a draft statement of claim was not mandatory, it is preferable that a limited partner seeking leave to pursue a derivative action on behalf of a limited partnership file a draft statement of claim.
[106] Notwithstanding this limitation, based on the record before the court, I am satisfied that the respondents meet the test for obtaining leave to pursue a derivative action on behalf of and in the name of Binscarth LP against Colligan, 186, and 975.
[107] Binscarth GP has certainly implicitly, if not explicitly, declined to take action against the third parties. The respondents appear to be acting in good faith. Binscarth GP and Grant are in an apparent conflict of interest with respect to the three third parties. Grant is the sole director of Binscarth GP, the sole officer, director, and shareholder of both 186 and 975, and the alleged common law spouse of Colligan. The conflict factor weighs heavily in favour of granting leave. The claims proposed to be asserted, as described previously in these reasons, certainly suggest a strong prima facie case against Colligan, 186, and 975. Lastly, although I am mindful of the extensive powers vested in Binscarth GP as detailed in the Limited Partnership Agreement and the LPA, in all of these circumstances, I am persuaded that it appears to be in the best interests of Binscarth LP that the action be brought.
[108] In making this determination, I recognize that it may be that the respondents will opt to simply pursue direct claims for knowing assistance and knowing receipt against Colligan, 186, and 975. I note that they cannot be assured at this stage that the legal costs associated with any derivative action will be borne by Binscarth LP. I do not propose to decide whether the respondents ought to bring a direct action; it is a matter for the respondents to decide. I am satisfied that in principle, a derivative action is available to the respondents if they choose to proceed with that course of action.[5] I would accordingly grant leave to the respondents to proceed with a derivative action against Colligan, 186, and 975 with respect to the claims outlined in para. 100 of these reasons. In this regard and to that extent, I would allow the appeal on the second issue. . Binscarth Holdings LP v. Grant Anthony
In Binscarth Holdings LP v. Grant Anthony (Ont CA, 2024) the Ontario Court of Appeal allowed 'derivative action' appeals, which are actions brought by (typically, shareholders but here) limited partners against principles of the (typically, corporations but here) a limited partnership and third parties. The case is useful to get a feel for limited partnerships structuring in modern practice.
Here the court considers 'derivative actions', both in the corporate and the partnership contexts, originating back to the 'rule in Foss versus Harbottle':Derivative Actions
[59] The rule in Foss v. Harbottle laid the groundwork for the derivative action. Zarnett J.A. described this rule in Tran v. Bloorston Farms Ltd., 2020 ONCA 440, 151 O.R. (3d) 563, at para. 1:The rule in Foss v. Harbottle (1843), 67 E.R. 189 (U.K.H.L.) prevents shareholders from suing for a loss in the value of their shares brought about by a wrong done to the corporation. The rule, which is well-entrenched in Canadian law, is a consequence of the separate legal personality of the corporation. Just as shareholders (subject to limited exceptions) cannot be sued for acts, debts, defaults or obligations of the corporation, only the corporation has a cause of action for wrongs done to it. [Footnote omitted.] [60] See also Hercules Managements Ltd. v. Ernst & Young, 1997 CanLII 345 (SCC), [1997] 2 S.C.R. 165, at para. 59.
[61] At common law, the corporate derivative action was “designed to counteract the impact of Foss v. Harbottle”: Rea v. Wildeboer, 2015 ONCA 373, 126 O.R. (3d) 178, at para. 18.[2] Over the years, courts developed a number of exceptions to the rule to allow a shareholder to seek to bring an action in the name of or on behalf of a corporation: see e.g., Edwards v. Halliwell, [1950] 2 All E.R. 1064 (C.A.), at p. 1067, per Jenkins L.J. Such a claim was described as derivative because it derived from the shareholder’s interest in the corporation in circumstances where the shareholders themselves did not have the capacity to sue: see Wildeboer, at para. 18.
[62] However, as Markus Koehnen describes in his book Oppression and Related Remedies (Toronto: Thomson Carswell, 2004), at p. 438, as a practical matter, all of the exceptions to the rule in Foss v. Harbottle were of limited utility. As a result, the statutory derivative action and the oppression remedy were introduced into both U.K. and Canadian corporate statutes, the latter including Ontario’s Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”) and the federal Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the “CBCA”). To obtain leave under either of these two statutes, a complainant must give 14 days’ notice to the company directors of its intention to seek leave and the court must be satisfied that: the directors will not pursue the claim; the complainant is acting in good faith; and it appears to be in the best interests of the corporation that the action be brought: OBCA, s. 246; CBCA, s. 239.
[63] In addressing these factors, some authorities state that leave should not be granted where there is an adequate alternative remedy available to the complainant: Budd v. Bertram, 2018 NSCA 95, 88 B.L.R. (5th) 81, at para. 34; Link v. Link, 2022 NSCA 14, 28 B.L.R. (6th) 1, at para. 55, leave to appeal refused, [2022] S.C.C.A. No. 117; and Crescent (1952) Ltd. v. Jones, 2011 ONSC 756, 82 B.L.R. (4th) 155, at para. 21. In a similar vein, other authorities state that granting leave to bring a derivative action is an extraordinary remedy: Vessair et al. v. Vessair et al., 2022 ONSC 500, 26 B.L.R. (6th) 300, at para. 48; Hevey v. Wonderland Commercial Centre Inc., 2021 ONSC 540, 154 O.R. (3d) 86, at para. 41; Chandler v. Sun Life Financial (2006), 2006 CanLII 3272 (ON SC), 14 B.L.R. (4th) 171 (Ont. S.C.), at para. 20; Zeifmans LLP v. Mitec Technologies Inc., 2019 ONSC 3643, 98 B.L.R. (5th) 90, at para. 76; and Re Loeb & Provigo Inc. (1978), 1978 CanLII 1517 (ON SC), 20 O.R. (2d) 497 (H.C.), at p. 499.
[64] To date, the Ontario legislature and other provincial legislatures have not introduced a derivative action into the LPA or its equivalent. Nonetheless, in some jurisdictions, jurisprudence has developed that recognizes a limited partnership derivative action at common law.
[65] It is helpful to consider the options available to a limited partner faced with arguable claims against a general partner.
[66] As we have seen, an action against the limited partnership is in essence an action against the general partner. As such, the first option to consider is the availability of a suit by a limited partner against the general partner.
[67] In the Supreme Court’s decision of Molchan, a limited partner sued a general partner for breach of fiduciary and statutory duties after the general partner sold off partnership lands to a related company. The limited partner brought the action in his own name, directly against the general partner. The majority of the Supreme Court, at p. 350, “assume[d] the highest status of the General Partner under the limited partnership, namely that of a trustee holding the properties of the partnership on behalf of all other partners.” In the circumstances, “the General Partner owe[d] a fiduciary duty to” the limited partner: at p. 371. While the Supreme Court found that, on the facts, there was no breach of that duty, at no point did the court suggest that the limited partner lacked standing to bring the action directly against the general partner.
[68] Similarly, in Alberta, limited partners have been permitted to directly sue the general partner. In 0738827 B.C. Ltd. v. CPI Crown Properties International Corporation, 2013 ABQB 499, 568 A.R. 389, aff’d 2014 ABCA 205, 577 A.R. 25, the plaintiffs were limited partners in a real estate venture. They alleged, among other things, that several defendants, including the general partner, had breached fiduciary duties owed directly to the limited partners and that the general partner did so with the knowing assistance of third parties. The defendants argued that limited partners could not commence individual actions against the general partner. The motion judge sided with the limited partners as, due to the wording of the limited partnership agreement, the general partner had contractually obliged itself to each of the limited partners. In other words, the limited partnership agreement imposed a fiduciary duty on the general partner and the limited partners were entitled to exercise their contractual rights to claim damages as a result of any breach of that fiduciary duty. The motion judge found that a limited partner could sue the general partner and could also bring a claim for knowing assistance against those involved in the general partner’s breach. The Court of Appeal of Alberta affirmed this decision at 2014 ABCA 205.
[69] Consistent with this determination, courts across Canada have routinely permitted limited partners to bring direct actions against their general partner. See e.g., Starratt v. Mamdani, 2015 ABQB 280, 72 C.P.C. (7th) 306, aff’d 2017 ABCA 92, 100 C.P.C. (7th) 197; Esselmont et al. v. Centreville Limited Partnership, 2000 MBCA 27, 148 Man. R. (2d) 119; Thompson Centres Inc. v. Hyde Park Limited Partnership, 2010 ONSC 718, 71 B.L.R. (4th) 10, leave to appeal refused, 2010 ONSC 1764 (Div. Ct.); Merklinger v. Jantree No. 3 Ltd. Partnership, 2004 CarswellOnt 6659 (S.C.); Barnes v. Blackfriar’s Development Inc., 1999 CarswellOnt 4450 (S.C.); Hartley v. Craig (1998), 60 O.T.C. 151 (Gen. Div.); and Spencer et al. v. Targa Capital Inc. et al. (1994), 1994 CanLII 17071 (MB KB), 99 Man. R. (2d) 15 (Q.B.).
[70] The second option to consider is the use of a derivative action. The ability of limited partners to bring a derivative action against general partners and third parties was squarely addressed by the High Court of England and Wales in Certain Limited Partners in Henderson PFI Secondary Fund II LLP v. Henderson PFI Secondary Fund II LP & Ors, [2012] EWHC 3259 (Comm.), [2013] 1 Q.B. 934, a decision recently cited with approval by the England and Wales Court of Appeal in Allianz Global Investors GmbH & Ors v. Barclays Bank Plc & Ors, [2022] EWCA Civ. 353 (Comm.), [2023] 1 All E.R. (Comm.) 20.
[71] Henderson, which was decided in 2012, is the first case to recognize limited partner derivative actions in English law: see Henderson, at para. 18. It involved limited partners seeking leave to bring two types of derivative claims: (i) one against the general partner for entering into an unauthorized investment contrary to its contractual and equitable obligations; and (ii) another against a third-party manager appointed by the general partner arising out of the manager’s breach of contract.
[72] As part of its analysis, the court discussed the nature of derivative claims. The court stated that it was common ground that derivative claims were not limited to the corporate context: at para. 18. They could arise flexibly in other circumstances where the justice of the case demanded it. However, the court noted that “special circumstances”[3] were required to justify a derivative action.
[73] Dealing firstly with the issue of a legal basis for a derivative claim against the general partner, the court held that the limited partners could not bring a derivative claim against the general partner, stating at paras. 29-32:The Partnership does not have any legal personality, being made up of the partners themselves, including the General Partner. Outside entities may contract with the Partnership, but all that means is that, in the case of an ordinary partnership, all partners are liable on the contract. In the case of a limited partnership, only the General Partner is liable, but that does not affect the nature of the partnership, which is a legal relationship between the partners themselves.
None of the provisions of the [partnership] agreement … provide for the General Partner to be liable to the Partnership as a whole, even if that were possible…. “The Partnership” is used as a convenient shorthand for the body of partners….
The General Partner can therefore be sued by any Limited Partner in respect of its liabilities under the [partnership agreement] and there is no suggestion that this involves management of the partnership business; nor could any such suggestion sensibly be made.
In these circumstances, there is simply no need and no room for a derivative action on the part of the claimants against the General Partner. Each can sue for its own loss on its own claim, without reference to the losses of other limited partners who have chosen not to make such a claim. Why the claimants should wish to pursue a derivative claim is a matter of speculation, but there is no reason why they should represent other Limited Partners who do not wish to be represented nor obtain any protection in costs or exemption from any obligation there might be to indemnify non-consenting partners against any loss suffered by them from the bringing of proceedings in their name. [74] The court concluded that, where the general partner acts in a manner contrary to the terms of the limited partnership agreement, “there is simply no need and no room for a derivative action” by the limited partners against the general partner: at para. 32.
[75] The court then turned to the derivative claim against the third-party manager. The court found that the claim could not be pursued by any of the limited partners individually but could only be undertaken by the general partner or through a derivative action. To determine whether such an action was available, the court had to consider whether there were “special circumstances” that would “justify the bringing of the claim in the context of the alternative rights and remedies available” to the limited partners: at para. 35. The court found that special circumstances were particularly warranted to ground a derivative action because the limited partnership agreement at issue barred limited partners from taking part in the operation or control of the limited partnership. The court held that the requisite special circumstances could be found in “the irreconcilable conflict of interest on the part of the General Partner” such that “[j]ustice requires [the limited partners] be able to take this step, rather than remove the General Partner with all the drastic consequences that this entails”: at para. 59. The court also noted that, due to the provisions of the limited partnership agreement and the U.K. Limited Partnerships Act, taking a derivative action would eliminate a limited partner’s limited liability for the period during which the claim was pursued.
[76] In approving of this decision in Allianz Global, the England and Wales Court of Appeal noted at para. 58, that “any claim against a third party in relation to damage to a limited partnership fund is a partnership asset and that only the general partner can bring proceedings against the wrongdoer; limited partners could only bring such proceedings on a derivative basis.”
[77] The respondents in this case relied on Covia to support the justification for derivative claims against both a general partner and a third party. That case involved “immense, complicated and detailed litigation”: Covia, at p. 70. One part of the summary judgment motion addressed a claim by a limited partner against another limited partner for breach of fiduciary duty, wrongful interference with the economic interests of the limited partnership, and conspiracy. In a related action, the general partner and the limited partnership were suing the same limited partner defendant for somewhat similar, but not identical, causes of action. Due to the language of the limited partnership agreement, Farley J. found that the limited partners had “implicitly recognized that their limited partnership should be governed by the rule in Foss v. Harbottle” and that therefore their claim was “derivative [of] and in fact subsumed in” the general partner’s claim: at p. 87. Farley J. found that the limited partner’s claim should be subsumed in the parallel limited partnership claim to effect a “practical consolidation” of the two actions: at p. 87. As such, the general partner’s claim continued but that of the limited partners could not. The language of the limited partnership agreement provision referred to by Farley J. gave the general partner the right to pursue legal actions in the name of the limited partnership, to act in the best interests of the limited partnership, and to enforce the rights of the limited partnership.
[78] Given the nature of the factual context, and the practical focus of Farley J.’s order, I do not regard Covia as conclusive authority on the availability of a derivative action to sue a general partner or a third party. The panel was not referred to any appellate authority in Ontario on limited partnership derivative actions.
[79] The respondents and the motion judge also relied on Watson v. Imperial Financial Services Ltd. (1994), 1994 CanLII 3293 (BC CA), 111 D.L.R. (4th) 643 (B.C.C.A.), and Asher Place, to support the availability of a limited partner derivative action.
[80] In Watson, some limited partners in a hotel project brought derivative claims in the name of and on behalf of limited partnerships and also advanced claims as limited partners against a third-party bank alleging that it participated in a breach of fiduciary duty committed by the general partner. The action was dismissed at first instance as disclosing no reasonable cause of action. On appeal, the order dismissing the action brought by the limited partners against the bank was upheld but the derivative claims were allowed to proceed. The court stated at p. 652:I think the rule in Foss v. Harbottle is applicable here even if it can be successfully asserted that because a partnership is not a legal entity as is a company, the respondent bank owed the duty I have referred to above to the individual partners. The basis of the application of the rule in Foss v. Harbottle is that the harm or damage is done to the partnership itself and whatever loss or damage the individual members of it suffer is as a consequence of and incidental to the fact that they are members of the partnership. [81] The court held at p. 652, that: “[t]he rule in Foss v. Harbottle applies in a proper case not just to corporations but also to associations of persons such as trade unions, and there are many American authorities which hold that the principle also applies to partnerships.” As it was not clear and obvious that the fraud exception to the rule applied, the derivative claims against the bank were allowed to proceed.
[82] In Asher Place, another case from the British Columbia Court of Appeal, the court again applied the fraud exception to the rule in Foss v. Harbottle and permitted a derivative action to be brought by limited partners on behalf of and in the name of a limited partnership against the general partner based on alleged wrongs committed by the general partner against the limited partnership in the conduct of its business. The court did not consider, as in Henderson, whether the limited partners could sue the general partner directly for breach of the partnership agreement. In these circumstances and for the reasons I address shortly, with respect, I would not follow this decision.[4]
[83] From this review, I draw the following conclusions with respect to the issues under appeal:(a) the general partner is responsible for managing the limited partnership and this includes suing third parties in the name of the limited partnership.
(b) As counterparties to a limited partnership agreement, the limited partners have standing to sue the general partner in the event of breach of the limited partnership agreement and, applying Molchan, breach of the LPA. [84] Applying these conclusions to this case, I fail to see why resort to a derivative action against Binscarth GP and Grant is required. The respondents can pursue a direct claim in their own names against both. First, this is consistent with the Supreme Court’s decision in Molchan, the Court of Appeal of Alberta decision in 0738827 B.C. Ltd., and Henderson, the leading decision in England and Wales on the subject.
[85] Second, the Limited Partnership Agreement contemplates such a cause of action by providing that Binscarth GP owes a fiduciary duty to the limited partners.
[86] Third, a direct action would not bind those limited partners who opt not to participate in the litigation. Each limited partner can assert their own claim. This enables those limited partners who wish to participate in the action to do so and, those who do not, to demur.
[87] Lastly, derivative actions are extraordinary in nature and leave need not be granted where other recourse exists. The essence of the claims the limited partners assert against Binscarth GP and Grant are breach of fiduciary duty and breach of the Limited Partnership Agreement. The relief available for breach of fiduciary duty is flexible and broad and if the limited partners are successful, an appropriate and responsive remedy may be fashioned by the trial judge: Hodgkinson v. Simms, 1994 CanLII 70 (SCC), [1994] 3 S.C.R. 377, at pp. 453-54; Mady Development Corp. v. Rossetto, 2012 ONCA 31, 344 D.L.R. (4th) 706, at paras. 18-20; and McBride Metal Fabricating Corp. v. H & W Sales Company Inc. (2002), 2002 CanLII 41899 (ON CA), 59 O.R. (3d) 97 (C.A.), at para. 30. In this case, there is simply no need for equity to intervene to authorize a derivative action on the part of the limited partners against Binscarth GP and Grant – there is no gap that needs to be filled.
[88] Although not necessary to decide for the purposes of this appeal, I also note that I fail to see how in these circumstances a limited partner bringing a direct action against a general partner for alleged breaches of a limited partnership agreement or the LPA would amount to an exercise of control or management by those limited partners who wish to pursue the litigation. Section 13 of the LPA states:(1) A limited partner is not liable as a general partner unless, in addition to exercising rights and powers as a limited partner, the limited partner takes part in the control of the business.
(2) For the purposes of subsection (1), a limited partner shall not be presumed to be taking part in the control of the business by reason only that the limited partner exercises rights and powers in addition to the rights and powers conferred upon the limited partner by this Act. [89] This suggests that a limited partner who seeks to enforce a general partner’s obligations to the limited partners under their agreement is not presumed to be taking control of the business of the limited partnership. This makes sense as a general partner is not going to sue itself. See also Henderson, at para. 31. . Sandhu v. Singh and Sikh Heritage Centre
In Sandhu v. Singh and Sikh Heritage Centre (Div Ct, 2022) the Divisional Court considered the standing of a former director for a common law derivative action under the Corporations Act:Issue # 1: Identity of Directors and Standing of Appellant
[22] This was the central issue argued on this appeal. The appellant was one of the seven directors of the original corporation, incorporated in May 1999 pursuant to the Ontario Business Corporations Act. The appellant’s position as a shareholder/director ceased when each of the original shareholders surrendered their shares for cancellation and SHC was thereafter continued as a not-for-profit corporation pursuant to the Letters Patent of Continuation dated August 3, 2001, and pursuant to the Corporations Act.
[23] Pursuant to the decisions in Deol v. Grewal, 2008 CanLii 44699 (ONSC) and Rexdale Singh Sabha Religious Centre v. Chattha, [2006] CanLii 39456 (ONCA), the appellant is neither a director, shareholder nor member of SHC as he was not named as an applicant on the Letters Patent of Continuation.
[24] As the jurisprudence in Ontario has established, when dealing with s. 332 of the Corporations Act leave of the court is necessary in order to protect corporations from derivative actions started by inappropriate parties. The appellant did not adduce evidence to show that he was a shareholder, member or creditor of SHC as required by s.332 of the Corporations Act.
[25] There are currently three directors. The appellant is not one of them.
[26] The appellant submits that the additional four “directors” attended meetings of the new corporation. But, the evidence indicates, so did many other people. The SHC sought input from many members of the temple.
[27] The Letters Patent are clear on their face. There were only three directors listed. The appellant submits that this arose from inadvertence. He requests on Order to correct this nunc pro tunc.
[28] Counsel for the appellant submitted that there is no clear evidence regarding this, and that perhaps the Application Judge should have ordered the matter to go to trial (notwithstanding that this was not requested of him).
[29] This is an argument built on quicksand. Section 284(1) of the Corporations Act provides as follows:284 (1) The persons named as first directors in the Act or instrument creating the corporation are the directors of the corporation until replaced by the same number of others duly elected or appointed in their stead. [30] The Act makes clear that the first directors are those who signed the application that created the corporation. The appellant is not one of them. Only one director has since been duly elected or appointed to replace a director. That is Partap Singh Dhinota, not the appellant. It follows that the appellant is not a director. This is a matter of law. The personal belief of the appellant is not relevant. Simply believing that one is a director does not make one so.
[31] Furthermore, there is no basis in law or in fact to accede to the appellant’s request to alter the number of directors nunc pro tunc. Section 285(1) of the Act governs changes to the number of directors. It provides as follows:285 (1) A corporation may by special resolution increase or decrease the number of its directors. [32] No special resolution has been passed changing the number of directors from three to seven.
[33] The situation before the court is analogous to Rexdale Singh Sabha Religious Centre v. Chattha, 2006 CanLII 39456 (ON CA), 2006 CarswellOnt 7413, [2006] O.J. No. 4698 (C.A.), upon which the Application Judge relied. It also involved a dispute as to who the directors of the non-profit corporation were. The Court of Appeal ruled as follows, at paras. 3 – 5:The Corporations Act, R.S.O. 1990, c. C.38 provides that upon incorporation, each applicant becomes a director and member of the corporation. The Act provides that persons may be admitted to membership thereafter by resolution of the Board of Directors.
No proper procedure was ever taken to change the members of these corporations in accordance with the Act. There was a total failure to comply with the Act. We cannot agree with the application judge’s conclusion that four of the five directors of Rexdale can be taken to have approved the creation of the list of the members.
It remains that the proper directors and members of the three corporations are the applicants for the letters patent of each corporation. [34] In the case at bar, we are similarly of the view that the proper directors and members of SHC are the three applicants for the Letters Patent of the corporation, subject only to the one approved change where Sherdaljit Dhillon was replaced by Partap Singh Dhinota. It follows that the appellant is not, at law, a director.
[35] Since he is not a director, nor is he a shareholder, member or creditor as required by s. 332 of the Act, the appellant has no standing to proceed with a common law derivative action without leave of the court. The appellant did not seek leave of the court. The Application Judge did not make a palpable and overriding error in so finding. . Wiens v. 1814047 Ontario Inc.
In Wiens v. 1814047 Ontario Inc. (Div Ct, 2020) the Divisional Court considers a statutory application for leave to commence a derivative action under s.246 of the OBCA, which is an order that a third party be allowed party status when the corporation fails to advocate for itself:[9] The application for leave is required under section 246 of the Business Corporations Act.[1] The test that applies when such an application is made is in the legislation. It requires the Court to be satisfied that:(a) the directors of the corporation or its subsidiary will not bring, diligently prosecute or defend or discontinue the action;
(b) the complainant is acting in good faith; and
(c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.[2]
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