Appointing an inspector to assist with Court directed investigations in Alberta will be done sparingly

Introduction

The Alberta Court of King’s Bench recently considered an application to appoint an inspector under Section 232 of the Alberta’s Business Corporations Act, RSA 2000 c B-9 (the “ABCA”). The Court in Khimji v Khimji, 2022 ABKB 829 (“Khimji”) revisited the applicable test and declined to make the appointment despite some concerning facts.

Under the ABCA, a shareholder may apply to the Court for an order directing an investigation to be made in relation to a corporation and any of its affiliates. If an investigation is ordered, the Court may appoint an inspector to assist with the Court directed investigation. The powers afforded to the Court on an application to appoint an inspector are broad and include the fixing of the remuneration of the inspector, authorizing the inspector to enter any premises in which the Court is satisfied there may be relevant information, and to examine and copy such records as found on the premises. In addition, a Court can direct any person to produce documents or records to an inspector, authorize an inspector to conduct a hearing, and require an inspector to make an interim or final report to the Court.  These are only a few examples of powers that may be afforded to an inspector under the ABCA, and the ABCA expressly provides that the “Court may make any order it thinks fit”.

The appointment of an inspector may be useful for shareholders who believe an organization has been involved in some impropriety, such as fraud or oppressive conduct. Such was the case for a father and son in the Khimji decision. However, despite the wording in the ABCA and the apparent broad discretion afforded by the Court, Khimji reminds parties that they should be cautious when seeking the appointment of an inspector, as it is an extraordinary remedy that the Court will grant sparingly.

Background

Amin and his brother, Moyez, went into business together over 40 years ago and, over time, turned their business into a number of companies operating in Edmonton and Calgary. Each brother brought their eldest son into their business ventures. The asset portfolio of the brothers included “10 hotels, an office condominium, and three parcels of land tagged for future development and expansion.” It was alleged that Moyez and his son, Hussain, grew increasingly secretive, leaving Amin and his son, Al-Karim, out of meetings, corporate governance matters, and operational decisions.

In November 2020, Amin and Al-Karim commenced a lawsuit through a Statement of Claim against Moyez, Hussain, and the group of companies from which they were being excluded. Amin and Al-Karim alleged that Moyez and Hussain were behaving in a hostile and oppressive manner by unilaterally imposing financial and operational decisions, not providing corporate information, carrying out unexplained financial transactions, and participating in improper governance.

In May 2021, Amin and Al-Karim obtained a court order requiring Moyez and Hussain to provide them with financial documents. Despite the order, Moyez and Hussain allegedly did not turn over accurate records. In March 2022, the companies’ accountant, who was an independent party providing accounting services to the companies in question, reached out to Amin’s accountant, asking what information Amin and Al-Karim required. There was no response to this query.

By July 2022, Amin’s accountant came to the conclusion that the records in Amin’s possession were inaccurate and could not be relied upon to assess the financial position or value of the companies. Armed with this information, Amin and Al-Karim pursued a court application to have an inspector appointed.

The heart of the issue was whether Amin and Al-Karim satisfied the test for appointing an inspector to conduct an investigation.

The legal test for appointing an inspector in Alberta

In his decision, Justice Nixon reiterated principles from Western Canadian Oil Management Services Inc v Arlyn Enterprises Ltd, 2008 ABQB 521, another Alberta case that contemplated appointing an inspector. In doing so, Justice Nixon noted that although Section 232 of the ABCA is broad and suggests that the Court may make an order appointing an inspector any time it thinks it is appropriate, case law has heavily narrowed the application of this section. It is well accepted that courts should not interfere with the affairs of a private corporation except in the clearest of cases, the appointment of an inspector being a drastic and extraordinary remedy.

Ultimately, the purpose of an order appointing an inspector is to give applicants more information to decide if there is enough information to commence a legal proceeding. This purpose underscores the bipartite test that determines if an inspector should be appointed where oppression is alleged:

1. Have the applicants established sufficient grounds to order an investigation?

There must be an appearance of behaviour that is oppressive, unfairly prejudicial or unfairly disregarding of the applicant’s interests for an investigation to be ordered under Part 18 of the ABCA.[1]

2. Should the court refuse to exercise its discretion to appoint an inspector?

Even if there is an appearance of oppression, unfair or prejudicial behaviour, the appointment of an inspector is an extraordinary, discretionary remedy. The appointment of an inspector should be granted only in the clearest of cases. The factors to be considered in deciding whether to grant the order for an inspector include: (i) do the Applicants still need access to important information; (ii) are there better routes, such as litigation, which can be used to acquire that information; and (iii) is an investigation prohibitively expensive, or will it give a tactical advantage to the applicant because of the financial burden it places on the respondent?[2]

Applying the test to the Khimji family business

Justice Nixon determined that the grounds to order an investigation were not established. Such investigations are meant to reveal facts that may otherwise be inaccessible to shareholders. Although the timeliness and quality of information that had been provided was questionable, that alone does not warrant an order appointing an inspector or an investigation.

Additionally, the test requires that there be a demonstrable show of oppression. Here, it was alleged that Amin and Al-Karim no longer had a say in the companies and that their repeated requests for financial information were denied. However, Justice Nixon found this to be contrary to the evidence. Amin, for example, still had management duties and access to withdraw funds from company bank accounts.

The Court further noted that Amin and Al-Karim did not exhaust other information gathering avenues before bringing an application to appoint an inspector. For instance, Amin and Al-Karim never responded to the companies’ independent accountant’s correspondence regarding the information Amin and Al-Karim wanted to obtain. Moreover, Amin and Al-Karim did not attempt to enforce the order requiring Moyez and Hussain to disclose financial information, nor did they allege a breach of this order. Rather than pursuing litigation steps in the normal course, Amin and Al-Karim sidestepped the process through their application to appoint an inspector. In light of the evidence, Justice Nixon was not convinced that the alleged conduct amounted to oppressive, unfair, or prejudicial behaviour.

In considering the second part of the bipartite test, Justice Nixon decided that the Court should refuse to exercise its discretion to appoint an inspector. He determined that there were better routes to acquire the financial information, namely litigation. In the Court’s view, as legal proceedings had already commenced, Amin and Al-Karim could obtain the financial information through the discovery process and through other litigation remedies. Importantly, Justice Nixon made clear that appointing an inspector should not be a civil action tool. The purpose of appointing an inspector is not to assist in finding fraud, but to determine facts that could help applicants decide if they should pursue litigation.

Key takeaways

Justice Nixon ended his decision with a summary of six points on the law of appointing an inspector as developed in the jurisprudence:

1. Appointing an inspector is a drastic and extraordinary remedy. Only in the clearest of cases will courts interfere in the affairs of private corporations.
2. An inspector will not be appointed if there is already enough information for a complainant to determine if legal proceedings are warranted.
3. The purpose of appointing an inspector is to provide an applicant with additional information so the applicant can decide if it has enough information to commence a lawsuit.
4. If an applicant is missing some information, litigation is the main route to acquire that information as a court-ordered investigation under the ABCA remains an expensive and extraordinary remedy.
5. An application to appoint an inspector may be refused if the court finds no additional facts that need to be brought out, and the issues raised are better disposed in litigation than in an investigation, as litigation has the ability to determine rights of the parties.
6. The appointment of an inspector should not be used as a tool in a civil lawsuit where an Applicant expects the corporation to pay. Instead, the parties alleging corporate wrongdoing can retain accounting and financial experts to assist in their lawsuit.

Overall, shareholders should not overestimate their ability to obtain an order appointing an inspector to investigate a corporation. The broad wording of section 232 of the ABCA, which suggests obtaining an order appointing an inspector is straightforward, may actually be misleading to parties considering bringing such an Application. This remedy is drastic, extraordinary, and applicable in narrow circumstances. Shareholders would have to demonstrate that they are being treated oppressively, unfairly, or prejudicially, yet not have enough information to know if they should commence a legal proceeding. Such circumstances apply to a very narrow category of corporate disputes. Retaining a financial expert to conduct a forensic analysis should remain the choice of litigants during the litigation process to assist with a finding of wrongdoing, corporate oppression, and or fraud.

Examples of circumstances in which the applicant successfully applied for an investigation largely come from decisions rendered by the Ontario courts and include: collapse in the Respondent corporation’s business, which was to be publicly listed (Millership v. HyperBlock Inc., 2019 ONSC 2903); a narrow, relatively inexpensive $7,000 investigation (Alyousef v Alyousef, 2017 ONSC 2106); failure to prepare audited financial statements for the Respondent corporations that the Applicants were prima facie beneficial shareholders of (Jones v Mizzi, 2016 ONSC 4907); defrauding of investors by the Respondent corporations (Moore v. Assaly, 2013 ONSC 817); use of company resources on a competing business for the sole benefit of the individual Respondent, accompanied with accounting records being deleted (Tsui-Wong v. Xiao, 2000 CanLII 22792 (ON SC); and, misrepresentations to investors by the Respondents regarding treatment of their investment monies, failure to provide audited financial statements and failure to pay dividends (Goodman v. 230 Major Mack Holdings Inc., 2014 ONSC 5088).

Miller Thomson LLP is here to help with all your business needs. For further answers to questions about appointing an inspector, corporate and commercial litigation, or the pursuit or defence of legal action, please contact Miller Thomson’s Commercial Litigation team.

[1] Kowch v Gibraltar Mortgage Ltd, 2010 ABQB 535 at para 30.

[2] Kowch v Gibraltar Mortgage Ltd, 2010 ABQB 535 at para 30.