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Securities - Securities Act - 'Misrepresentation' [SA 130.1]. Ontario Securities Commission v. Bridging Finance Inc.
In Ontario Securities Commission v. Bridging Finance Inc. (Ont CA, 2023) the Court of Appeal considered what I think can be describes as a securities liquidation. A "privately held investment management firm" was put into receivership pursuant to s.129 of Ontario's Securities Act (OSA) by the Ontario Securities Commission, in addition to related ancillary orders.
The case itself was an appeal of an application to declare priority (or rather non-priority or pari passu) of different investors. In the course of the receivership several investors sought rescission remedies [under OSA 130.1: 'Liability for misrepresentation in offering memorandum']:[4] Following the appointment of the Receiver, certain Unitholders and their advisors informed the Receiver that they may wish to pursue and/or preserve certain rights of rescission or rights of action for damages that arose before the Appointment Order as a result of alleged misrepresentations contained in the offering memoranda. Those potential claimants included Unitholders who intended to bring a claim for rescission under s. 130.1 of the OSA (or equivalent securities legislation) or who had statutory rescission rights granted to them in their contracts (the “Statutory Rescission Claims”). These investors (the “Statutory Rescission Claimants”[1]) assert that they should have a priority claim on the assets of the Bridging Funds.
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(3) Statutory Rescission Claims
[25] As noted, the motion judge found that the Statutory Rescission Claims are entitled to priority over the General Unitholders’ Claims. He also stated that the remedy for the Statutory Rescission Claimants must be meaningful and concluded that it was appropriate to impose a constructive trust.
[26] It is unclear from the reasons how the motion judge arrived at this conclusion. In his analysis, the motion judge made the following statements without referring to any specific authorities. He stated that “the nature of rescission as a remedy creates a de facto priority.” The motion judge also found that “statutory rescission is a remedy conferred by the OSA and its application is non-discretionary.” It would appear, therefore, that there are two possible sources for the priority granted by the motion judge to the Statutory Rescission Claims: (a) the wording of s. 130.1 of the OSA, and (b) the nature of the rescission remedy. Below, I will consider each source in turn.
(a) Section 130.1 of the OSA
[27] The relevant subsections of s. 130.1 of the OSA provide:130.1(1) Where an offering memorandum contains a misrepresentation, a purchaser who purchases a security offered by the offering memorandum during the period of distribution has, without regard to whether the purchaser relied on the misrepresentation, the following rights:
1. The purchaser has a right of action for damages against the issuer and a selling security holder on whose behalf the distribution is made.
2. If the purchaser purchased the security from a person or company referred to in paragraph 1, the purchaser may elect to exercise a right of rescission against the person or company. If the purchaser exercises this right, the purchaser ceases to have a right of action for damages against the person or company. 2004, c. 31, Sched. 34, s. 7.
Defence
(2) No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation. 1999, c. 9, s. 218.
Limitation in action for damages
(3) In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of the damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon. 1999, c. 9, s. 218.
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Limitation re amount recoverable
(6) In no case shall the amount recoverable under this section exceed the price at which the securities were offered. 1999, c. 9, s. 218.
No derogation of rights
(7) The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law. 1999, c. 9, s. 218.[3] [28] Given the motion judge’s comments about s. 130.1 being “non-discretionary,” it is essential to consider what the section actually provides. It is clear on the face of s. 130.1 that the legislature has made it easier to assert a claim for either rescission or damages based on a misrepresentation in an offering memorandum by obviating the need to prove reliance. The legislature also took the decision regarding choice of remedy between damages or rescission out of the hands of the court and permitted the plaintiff to make the election. Therefore, the OSA confers a non-discretionary right to elect a remedy, but it does not grant a non-discretionary right to a remedy. The right to damages or rescission is not automatic. The court must be satisfied regarding several factors, including that a misrepresentation was made and that the defence in s. 130.1(2) does not apply. Only then will a plaintiff be entitled to a remedy. This remedy is available generally to security holders and is not limited to insolvency situations.
[29] The more significant issue is whether, in enacting this section, the legislature intended to grant a priority to rescission claimants. There is no language in the section that explicitly references granting a priority. This is a curious omission if that was the legislature’s intention. A legislature is presumed to use the clearest way of expressing its intention: Ruth Sullivan, The Construction of Statutes, 7th ed. (Toronto: LexisNexis Canada, 2023), at § 8.02. Accordingly, the ordinary meaning of a legislative provision is deemed to be the meaning intended by the legislature, unless compelling reasons exist to justify a departure from the ordinary meaning: Sullivan, at § 3.01; Rizzo & Rizzo Shoes Ltd. (Re), 1998 CanLII 837 (SCC), [1998] 1 S.C.R. 27, at para. 21. In keeping with this presumption, Canadian courts have consistently held that express and unambiguous statutory language is required to create a statutory priority. The list of examples is numerous, both in the insolvency context and beyond.
[30] Courts have held that the absence of express statutory language is fatal to claims for statutory priority. For example, the Supreme Court has rejected the proposition that the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (“BIA”) or the Companies’ Creditors Arrangement Act, R.S.C., 1985, c. C‑36 (“CCAA”) confer on the Crown a statutory priority in respect of GST claims upon insolvency, concluding that if Parliament had “sought to give the Crown a priority for GST claims, it could have done so explicitly as it did for source deductions”: Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379, at para. 51. Similarly, this court has refused to import a municipal super priority into the provisions of the Residential Tenancies Act, 2006, S.O. 2006, c. 17, dealing with payment for vital services, holding that there is no basis for any sort of priority “[w]ithout explicit language from the legislature”: Hamilton (City) v. The Equitable Trust Company, 2013 ONCA 143, 114 O.R. (3d) 602, at para. 29. In short, courts have rejected statutory priority claims unless the claim is supported by unequivocal statutory language.
[31] Two such examples of clear language are s. 67(3) of the BIA and the former s. 18.3(2) of the CCAA. Both of these provisions use express language to provide that deemed trusts for source deductions – unlike other deemed trusts – remain effective in insolvency. That is, the ordinary meaning of these provisions indicates that Parliament has legislated a statutory priority “explicitly and elaborately”: Century Services, at para. 45. Other BIA and CCAA provisions similarly use explicit language to create a statutory priority. These provisions include BIA, s. 14.06(7)(b) and CCAA, s. 11.8(8)(b) (super priority of the Crown for environmental remediation costs in respect of the real property of a debtor), as well as BIA, s. 136 (general priority distribution scheme for the property of a bankrupt).
[32] The legislative use of express language to create a priority is not limited to insolvency statutes. It is also evidenced in, for example, ss. 221(1) and 222 of the Business Corporations Act, R.S.O. 1990, c. B.16; ss. 30-35 of the Personal Property Security Act, R.S.O. 1990, c. P.10; and ss. 2- 5 of the Wages Act, R.S.O. 1990, c. W.1. In each of these statutory provisions, the language indicating a priority is plain and unambiguous.
[33] The primary difficulty with the submission that s. 130.1 grants a priority is that the legislation does not state that explicitly. I have difficulty accepting that it was the intention of the legislature to grant a priority by implication. The whole point of creating statutory priorities is to alert the world regarding the distribution scheme for a given fund. The idea is to create certainty so that claimants understand where they stand relative to other claimants. A clear priority scheme also makes it easier for courts to adjudicate competing claims. They are not required to examine the equities of the positions of the parties but are only obliged to implement the existing rules. The important public policy objectives of certainty, transparency, and efficiency underlying statutory priorities would be eroded if courts presume an intention of a legislature to create a priority. I decline to do so in this case.
(b) The Nature of the Rescission Remedy
[34] The other suggested basis for a priority is the nature of the remedy of rescission. The argument advanced by the Statutory Rescission Claimants is that rescission is a proprietary remedy, which puts the claimant in a position where the contract is void ab initio. This submission may be dealt with by considering the categories of potential rescission claims.
[35] The Statutory Rescission Claims are reserved for those who can assert a claim under s. 130.1 of the OSA (and equivalent securities legislation) and residents of British Columbia, Alberta, and Quebec who were granted that statutory remedy under the constating documents. For the purpose of the motion, it was agreed that these claimants would be able to make out their claims and no defences would apply.
[36] The competing claims were the General Unitholders’ Claims, which, as mentioned, are the claims that are not Statutory Rescission Claims or Potential Redemption Claims. The Agreed Statement of Facts also references a court order that tolled limitation periods for certain claims. Included in this list are claims for damages or rescission pursuant to, among other things, “any common law or civil law rights.”
[37] It is clear, therefore, that the General Unitholders’ Claims include common law claims to rescission. In other words, there is a subclass of Unitholders who could potentially assert a successful common law claim for rescission. There can therefore be no basis to award a priority to the Statutory Rescission Claimants over those with common law claims to rescission. Regardless of how the claim for rescission is established, the nature of the remedy is identical. Thus, the motion judge erred in finding that the Statutory Rescission Claimants have a “different relationship to the assets.”
[38] In summary, neither the wording of s. 130.1 of the OSA nor the nature of the remedy of rescission provides a basis for finding that the Statutory Rescission Claimants have a priority. Accordingly, I would grant the General Unitholders’ appeal.
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