Indexed as:

Budd v. Gentra Inc.

Between

Raymond Budd, plaintiff, and

Gentra Inc., Michael A. Cornelissen, H.M. MacDougall, G.

Drummond Birks, Henry Collingwood, Eggerton W. King, Allen T.

Lambert, Kenneth Leung, Gilbert I. Newman, Pierre Taschereau,

Jean C. Wadds, R. James Balfour, Jean A. Beliveau, Kenneth R.

Clarke, E. Neil Mckelvey, Earl H. Orser, Jack L. Cockwell,

James M. Tory, Marshall M. Williams, Melvin M. Hawkrigg,

Maurice Riel, Thomas R. Bell, Brian A. Canfield, Adrienne

Clarkson, Gordon R. Cunningham, David L. Donne, Fraser M.

Fell, Paul Gobeil, F. Warren McFarlan, Margaret E. Southern,

B. Lee Bentley, Nicholas W.R. Burbidge, David W.S. Dunlop,

Anthony Flynn, William J. Inwood, Laurent M. Joly, Charles F.

Macfarlane, Ian A.C. McCallum, Ernst & Young, Trilon Holdings

Limited, Trilon Financial Corporation, Great Lakes Group Inc.,

Arteco Holdings Inc., Brascan Limited, Brascan Holdings Inc.

[1996] O.J. No. 3515

12 O.T.C. 117

66 A.C.W.S. (3d) 43

Court File No. B102/95

Ontario Court of Justice (General Division)

Commercial List

Farley J.

Heard: April 1-2, 1996.

Judgment: August 27, 1996.

(36 pp.)

[Ed. note: A Corrigendum was released by the Court October 15, 1996 and the correction has been made to the text.]

Practice -- Pleadings -- Statement of claim -- Particulars - - Particulars of particular matters -- Allegations of intent -- Amendment of pleadings -- Where pleading previously struck out -- Striking out pleadings -- Grounds, failure to disclose a cause of action -- Company law -- Actions against corporations and directors -- Action for oppressive conduct -- Persons entitled.

This was a motion by the defendant Gentra's auditor, Ernst & Young, to strike out certain paragraphs in the class action statement of claim and to have the action dismissed against it. The Director and the Officer defendants sought the same relief. The defendants also requested that the plaintiff not be granted leave to amend the statement of claim as the pleading had already been amended. The class action sought relief under the section 241 of the Canada Business Corporations Act. The plaintiff alleged that the security holders of Gentra were dealt with in an oppressive, or prejudicial.

HELD: The motions to strike were allowed but the plaintiff was permitted to further amend the statement of claim. On a motion to strike under Rule 21.01(1)(b), the issue was whether there was a radical defect in the statement of claim which would not permit the plaintiff at law to succeed. On a motion to strike under Rule 21.01, the issue was whether the action was frivolous, vexations or an abuse of process while under Rule 25, the issue was whether the pleadings fit that description. The plaintiff was permitted to amend paragraph 12.01 of the Claim, which pleaded that the defendants refused the company access to the Facility. This was not one of the clearest of cases where leave to amend could be refused under Rule 25.11. The blanket and bald pleadings could not be sustained. The plaintiff failed to establish that there was a cause of action under section 241. The plaintiff could not show that the directors and officers had a fiduciary duty to the security holders rather than to the corporation. Similarly, an auditor in an ongoing audit arrangement with a corporation owed its duty to the corporation and not to its shareholders. There was no allegation that the auditor was advised that its reports would be relied on to make investments in Gentra. The plaintiff was given another chance to clean up his pleading in order to focus his claims against specific defendants.

Statutes, Regulations and Rules Cited:

Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 241, 241(3)(f), 241(3)(g), 241(3)(j).

Ontario Rules of Civil Procedure, Rules 1.04, 21.01(1)(b), 25.06, 25.06(8), 25.11, 37.

Counsel:

R.G. Colautti and Craig Houle, for the plaintiff respondent.

Alan Lenczner, Q.C. and Risa Kirshblum, for the moving party defendant, Ernst & Young.

Steven Sharpe and James Doris, for the moving party defendant directors.

Charles F. Scott and Lillian Y. Pan, for the moving party defendant officers.

Bernard McGarva and John Longo, for the defendant controlling shareholders.

FARLEY J.:--

Relief Sought

1 Ernst & Young ("E&Y"), the auditor of Gentra Inc. ("Gentra") (previously named Royal Trustco Limited) moved to strike out paragraphs 1, 2, 3.2 and 4 of the statement of claim in this proposed class proceeding and to have the action dismissed as against E&Y. The Director Defendants (namely H.M. MacDougall, G. Drummond Birks, Henry Collingwood, Eggerton W. King, Allen T. Lambert, Kenneth Leung, Gilbert I. Newman, Pierre Taschereau, Jean C. Wadds, R. James Balfour, Jean A. Beliveau, Kenneth R. Clarke, E. Neil McKelvey, Earl H. Orser, Jack L. Cockwell, James M. Tory, Marshall M. Williams, Melvin M. Hawkrigg, Richard W. Pound, Roger Phillips, J. Trevor Eyton, Maurice Riel, Thomas R. Bell, Brian A. Canfield, Adrienne Clarkson, Gordon R. Cunningham, David L. Donne, Fraser M. Fell, Paul Gobeil, F. Warren McFarlan and Margaret E. Southern) moved to strike out paragraph 5.3, the phrase "director defendants" from paragraphs 10.05 to 10.07, 10.09, 11.01, 11.11, 12.01, 12.04 and 12.05 of the statement of claim and to have the action dismissed as against the Director Defendants. The Officer Defendants (namely B. Lee Bentley, Nicholas W.R. Burbidge, Michael A. Cornelissen, David W.S. Dunlop, Anthony Flynn, William J. Inwood, Laurent M. Joly, Charles F. Macfarlane and Ian A.C. McCallum) moved to strike out paragraphs 5.4, 10.03, 10.05 (the phrase "management defendants"), 10.06 (the phrase "management defendants"), 10.07 (the phrase "the management defendants"), 10.07(b) (the phrase "management defendants"), 10.07(1) (the phrases "all of the management defendants" and "the officers"), 11.11 (the phrase "the management defendants and"), 12.01 (the phrase "and the management defendants"), 12.04 (the phrase "management defendants") and 12.05 (the phrase "management defendants") of the statement of claim and to dismiss the action as against the Officer Defendants. It was proposed that there should be no leave to amend if any of the provisions were struck out as the plaintiff had already had a previous chance to tighten up his pleadings in converting his application to an action (see also my reasons of October 6, 1995). It should be noted that the plaintiff did in fact withdraw a number of allegations in that conversion, although it does appear that in parts of the statement of claim inappropriate application terminology has been (inadvertently) maintained.

2 E&Y cited no rule but merely stated that the relief claimed by the plaintiff pursuant to s. 241 of the Canada Business Corporations Act, R.S.C. 1985. c. C-44, as amended ("CBCA") was not available against E&Y. The Defendant Directors relied on Rules 1.04, 21.01(1)(b) and 37 of the Rules of Civil Procedure as well as s. 241 CBCA. The Defendant Officers relied on Rules 1.04, 21.01(1)(b), 25.06, 25.11 and 37 of the Rules. Counsel do not appear to have referred specifically to Rule 37 in their factums or oral submissions. The balance of the rules and s. 241 CBCA are set out below:

Rules:

1.04(1) These rules shall be liberally construed to

secure the just, most expeditious and least expensive

determination of every civil proceeding on its merits

(2) Where matters are not provided for in these rules, the practice shall be determined by analogy to them.

(3) Where a party to a proceeding is not represented by a solicitor but acts in person in accordance with subrule 15.01(2) or (3), anything these rules require or permit a solicitor to do shall be done by the party.

21.01(1) Any party may move before a judge,

(b) to strike out a pleading on the ground that it discloses no reasonable cause of action or defence, and the judge may make an order or grant judgment accordingly.

25.06(1) Every pleading shall contain a concise statement of the material facts on which the party relies for the claim or defence, but not the evidence by which those facts are to be proved.

(2) A party may raise any point of law in a pleading, but conclusions of law may be pleaded only if the material facts supporting them are pleaded.

(3) Allegations of the performance or occurrence of all conditions precedent to the assertion of a claim or defence of a party are implied in the party's pleading and need not be set out, and an opposite party who intends to contest the performance or occurrence of a condition precedent shall specify in the opposite party's pleading the condition and its non-performance or non-occurrence.

(4) A party may make inconsistent allegations in a pleading where the pleading makes it clear that they are being pleaded in the alternative.

(5) An allegation that is inconsistent with an allegation made in a party's previous pleading or that raises a new ground of claim shall not be made in a subsequent pleading but by way of amendment to the previous pleading.

(6) Where a notice to a person is alleged, it is sufficient to allege notice as a fact unless the form or a precise term of the notice is material.

(7) The effect of a document or the purport of a conversation, if material, shall be pleaded as briefly as possible, but the precise words of the document or conversation need not be pleaded unless those words are themselves material.

(8) Where fraud, misrepresentation, breach of trust, malice or intent is alleged, the pleading shall contain full particulars, but knowledge may be alleged as a fact without pleading the circumstances from which it is to be inferred.

(9) Where a pleading contains a claim for relief, the nature of the relief shall be specified and, where damages are claimed,

(a) the amount claimed for each claimant in respect of each claim shall be stated; and

(b) the amounts and particulars of special damages need only be pleaded to the extent that they are known at the date of the pleading, but notice of any further amounts and particulars shall be delivered forthwith after they become known and, in any event, not less than ten days before trial.

25.11 The court may strike out or expunge all or part of a pleading or other document, with or without leave to amend, on the ground that the pleading or other document,

(a) may prejudice or delay the fair trial of the action;

(b) is scandalous, frivolous or vexatious; or

S. 241 of the CBCA

241.(1) [Application to court re oppression.] - A complainant may apply to a court for an order under this section.

(2) [Grounds.] - If, on an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates

(a) any act or omission of the corporation or any of its affiliates effects a result,

(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or

(c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of.

(3) [Powers of court.] - In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

(a) an order restraining the conduct complained of;

(b) an order appointing a receiver or receiver-manager;

(c) an order to regulate a corporation's affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement;

(d) an order directing an issue or exchange of securities;

(e) an order appointing directors in place of or in addition to all or any of the directors then in office;

(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder;

(g) an order directing a corporation, subject to subsection (6), or any other person, to pay to a security holder any part of the moneys paid by him for securities;

(h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract;

(i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by section 155 or an accounting in such other form as the court may determine;

(j) an order compensating an aggrieved person;

(k) an order directing rectification of the registers or other records of a corporation under section 243;

(l) an order liquidating and dissolving the corporation;

(m) an order directing an investigation under Part XIX to be made;

(n) an order requiring the trial of any issue.

(4) [Duty of directors.] - If an order made under this section directs amendment of the articles or by-laws of a corporation,

(a) the directors shall forthwith comply with subsection 191(4); and

(b) no other amendment to the articles or by-laws shall be made without the consent of the court, until a court otherwise orders.

(5) [Exclusion.] - A shareholder is not entitled to dissent under section 190 if an amendment to the articles is effected under this section.

(6) [Limitation.] - A corporation shall not make a payment to a shareholder under paragraph (3)(f) or (g) if there are reasonable grounds for believing that

(a) the corporation is or would after that payment be unable to pay its liabilities as they become due; or

(b) the realizable value of the corporation's assets would thereby be less than the aggregate of its liabilities.

(7) [Alternative order.] - An applicant under this section may apply in the alternative for an order under section 214.

3 It should be noted that the plaintiff was unaware of the rule change to Rule 25.06(8). Under the former rule "malice" or "intent" could be alleged as a fact without pleading the circumstances from which it was to be inferred. The old rule read as follows:

Where fraud, misrepresentation or breach of trust is alleged, the pleading shall contain full particulars, but malice, intent or knowledge may be alleged as a fact without pleading the circumstances from which it is to be inferred.

Thus if would appear that if "malice" or "intent" is alleged, then the circumstances from which it is to be inferred must be pleaded.

Statement of Claim Details

4 The provisions of the statement of claim said to be offensive by various of the moving parties are as follows:

1. The plaintiff claims:

1.1 An order, pursuant to s. 241 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 declaring that:

a) the acts and omissions of the respondents have effected a result

(b) the business or affairs of the respondent Gentra Inc. (formerly Royal Trustco) have been conducted in a manner; or

(c) the powers of the directors of Gentra Inc. (formerly Royal Trustco) have been exercised in a manner that is oppressive, unfairly prejudicial to or unfairly disregards the interests of the class of security holders or former security holders represented by the applicant, (being past or present security holders of Royal Trustco Limited, now Gentra Inc., and who are members of the Litigation Committee of Public Shareholders of Royal Trustco).

1.2 An order, pursuant to s.241(3)(f), (g) and (j) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 directing the respondents, or each of them, to purchase the securities of the those [sic] members of the class of complainants represented by the applicant, who presently own or beneficially own securities of Gentra Inc. (formerly Royal Trustco) at a price or compensation equal to the purchase price originally paid by each member of the class for their security;

1.3 An order, pursuant to s. 241(3)(f), (g) and (j) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 directing the respondents, or each of them, to compensate those members of the aforesaid class who had purchased securities prior to March 18, 1993, but who have since disposed of them, for a sum equal to the price paid by each of these class members less the average market price of the security in the twenty days following March 18, 1993;

1.4 In the alternative to paragraphs 1.2 and 1.3 above, an order pursuant, to section 241(3)(j) of the Canada Business Corporations Act, compensating those members of the class of complainants represented by the applicant;

1.5 An order, pursuant to s. 241(3)(j) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 and s. 128 of the Court of Justice Act, R.S.O. 1990 c. 46 awarding prejudgment interest on all sums realized pursuant to paragraphs 1.2 and 1.3 above;

2.0 Investigation:

2.1 An interim order, pursuant to s. 241(3)(m), and 229 of the Canada Business Corporations Act, R.S.C. 1985 c. C-44 appointing an Investigator/Inspector to inquire into investigate and report back to this court, on the issues identified in paragraphs 12.01 to 12.10 herein;

2.2 An order requiring the respondent Gentra Inc. to pay all reasonable costs and disbursements of the Investigator;

2.3 An order authorizing the Inspector to enter any premises of the respondents, or each of them, their servants agents or employees or any other person having knowledge of this order to obtain, examine, copy and/or retain any information relevant to the issues identified in paragraph 2.1 above;

2.4 An order directing the respondents, their servants, agent employees and any other person having knowledge of this order to produce any documents, recordings or records to the Inspector;

2.5 An order allowing the Inspector to conduct a hearing or hearings, administer oaths and examine persons under oath, in conducting the investigation on matters relevant to the issues identified in paragraph 2.1 above;

2.6 An order authorizing the Inspector to retain such independent professional forensic, accounting and legal services and opinions as he may deem advisable to assist in the conduct of the investigation.

3.2 Costs on a solicitor client basis against the respondents or each of them.

4.0 Miscellaneous

4.1 Such further and other relief as to this Honourable Court may seem just.

5.3 the defendants Michael A. Cornelissen, H.M. MacDougall, G. Drummond Birks, Henry Collingwood, Eggerton W. King, Allen T. Lambert, Kenneth Leung, Gilbert I. Newman, Pierre Taschereau, Jean C. Wadds, R. James Balfour, Jean A. Beliveau, Kenneth R. Clarke, E. Neil McKelvey, Earl H. Orser, Jack L. Cockwell, James M. Tory, Marshall M. Williams, Melvin M. Hawkrigg, Richard W. Pound, Roger Phillips, J. Trevor Eyton, Maurice Riel, Thomas R. Bell, Brian A. Canfield, Adrienne Clarkson, Gordon R. Cunningham, David L. Donne, Fraser M. Fell, Paul Gobeil, F. Warren McFarlan and Margaret E. Southern, (hereinafter collectively referred to as the director defendants) were directors of the defendant, Royal Trustco (now named Gentra Inc.).

5.4 The defendants, Michael A. Cornelissen, B. Lee Bentley, Nicholas W.R. Burbidge, David W.S. Dunlop, Anthony Flynn, William J. Inwood, Laurent M. Joly, Charles F. Macfarlane and Ian A.C. McCallum (hereinafter referred to collectively as the management defendants) were officers of the defendant Royal Trustco (now Gentra Inc.)

10.03 Management of Royal Trustco, and in particular the CEO, Michael Cornelissen, reported directly to the Hees-Edper (Brascan or Trilon) representative on the Trustco Board of Directors. This fact was never disclosed to investors or security holders.

10.05 The plaintiff further pleads that the Director defendants, management defendants and the controlling shareholder defendants had a similar duty to ensure that Gentra (Royal Trust), made full, frank and timely disclosure of any change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the company's securities. The plaintiff further pleads that these defendants had a fiduciary obligation to security holders to ensure the company made such disclosure.

10.06 The plaintiff further pleads that the defendant Gentra (Royal Trust) had a specific duty to disclosure, in a timely manner, and, the Director defendants, management defendants, and the controlling shareholder defendants, had a continuing duty to ensure that Gentra made timely disclosure of the following developments:

a) Changes in share ownership that may affect control of the company;

b) Changes in corporate structure;

c) Major corporate acquisitions or dispositions;

d) Changes in capital structure;

e) Borrowing of significant amounts of funds;

f) Developments concerning the company's resources;

g) Entering into or loss of significant contracts

h) Evidence of significant increases or decreases in near term earnings prospects, and in particular, where a significant increase or decrease in earnings is indicated in the next fiscal quarter;

i) Changes in capital Investment plans or corporate objectives;

j) Events of default under financing or other agreements;

k) Any other developments that could reasonably be expected to significantly affect the market price or value of the company's securities, or that reasonably be expected to affect investment decisions.

10.07 The defendant Gentra, the directors defendants, the management defendants and the controlling shareholder defendants failed to make timely, fair and frank disclosure of material changes in the business, operations, capital or affairs of Gentra (Royal Trust) in the following particulars:

a) Trustco management initiated or sustained a policy of loaning money in the higher risk lending was also followed in Canada and Europe. This shift in business lending policy was not disclosed to Trustco's investors.

b) Management defendants, director defendants and controlling shareholder defendants were fully aware in 1990 and 1991, that due to the deterioration in the commercial real estate and construction load portfolios, that there was a need to provide for much higher loss reserves, which in turn would effect Trustco's bottom line. These defendants knew or ought to have known, for example, that in respect of Pacific First along, they had identified further loans in respect of which reserves should have been taken in the amount of $150 million U.S. These loan losses, if fully and reasonably taken into account in 1991, would have turned the net income of $107 million into a loss for the second year in a row.

c) By the first quarter of 1991, serious problems had arisen at Pacific First due to deteriorating loan portfolios. These defendants caused Gentra to take approximately $150 million U.S. of the riskiest portions of certain non-performing loans, and transfer them out of the regulated bank and into an unregulated subsidiary of Trustco through a loan participation agreement between Trustco and Pacific First. The loans or portions of loans which were transferred out of Pacific First and into another Trustco subsidiary were, in the estimation of Trustco management, Pacific First Management and U.S. regulators assessment, of doubtful and risky quality. Although these loans were identified as doubtful, they were not properly taken into account in the 1991 financial statements, although the transfer did occur in 1991.

d) By the middle of December, 1992, all the defendants were aware that an independent review of the company by an outside investigative firm had determined that the company was unsalvageable without a substantial injection of equity.

e) The true extend of loan losses and the deplorable condition of affairs at Pacific First were not disclosed in Trustco's 1990 and 1991 financial statements. In particular, the restrictions and negative audit opinions of the U.S. regulators (The OTS) was never disclosed to Trustco security holders.

f) The company's loan loss provisions for 1990, 1991 and 1992 were materially understated. The defendant Ernst & Young, as auditors, either failed to detect this fact with respect to the 1990 - 1991 audited financial statements, or failed to ensure that appropriate provisions were taken. This caused a material misstatement to be made of Royal Trustco's true state of affairs.

g) The fact that the Trilon standby facility, (whereby the defendants Trilon and Great Lakes committed to arrange the placement of or purchase, if so required by Royal Trustco, sufficient securities to ensure the success of each issue of securities by Royal Trustco) was available at all times to Gentra (Royal Trustco) if it needed capital, was not true either at the time it was made as aforesaid in the 1991 Annual Report, or had ceased to be true prior to the 1992 year end. In either case no disclosure was made to the public that the facility ceased to be available.

h) The fact that Trustco had been denied access to wholesale debt markets was also not disclosed to shareholders until the release of the 1992 financial statements. Trustco had no access on economic terms to those markets since 1990.

i) The third quarter report for 1992, issued by the company on November 2, 1992 represented that the company was healthy, solvent, liquid and profitable when it was not.

j) The company's 1991 financial statements showed a deferred tax asset for all subsidiaries and the parent corporation, of $214 million. None of this was supportable, but was nevertheless carried as an asset on the balance sheet. If a proper full valuation allowance had been made in respect of this issue, the company would have shown a net loss of $5 million in 1991. Deferred tax assets were therefore recorded at an insupportable level.

k) Contrary to statements made in the company's 1991 Annual Report, transactions concerning the Management Share Purchase Plan (MSPP) had a significant impact on the financial position of the company at December 31, 1991. The MSPP transactions had significantly overstated the statutory capital of the company at December 31, 1991, as well as in 1990 and previously.

l) Massive loans had been made to participants of the MSPP. Participants in the MSPP included all of the management defendants, and some or all of the director defendants (the particulars of which directors are at present unknown to the plaintiff). The effect of the massive loans made to participants of the MSPP was to fetter their free exercise of discretion, and to subject them to conflicts of interests. Officers, directors and executive management consequently had a pecuniary interest to conclude an arrangement or sale of the company's operating assets to another financial institution that would ensure their loans were discharged. Consequently, the plan participants were not free to work in the best interest of the shareholders.

m) Loans made to MSPP participants were in fact uncollectible, due to the fact that commitments had been made to forgo collection on the loans.

10.09 The plaintiff states, and the fact is that the defendant Gentra (Royal Trustco), the director defendants, the controlling shareholder defendants and the defendant auditors Ernst & Young, in failing in their duties to ensure full, frank and timely disclosure of material information, as particularized in paragraphs 10.01 to 10.08 above, thereby:

a) Committed or participated in acts and omissions which have effect a result; or

b) Caused the business or affairs of the respondent Gentra Inc. (Royal Trustco) to have been conducted in a manner; or

c) The powers of the directors of Gentra Inc. were exercises in a manner that is oppressive, unfairly prejudicial to or unfairly disregards the interests of he minority shareholders of Gentra Inc.

11.01 The plaintiff pleads that there is an appearance that the business or affairs of the Gentra (formerly Royal Trustco) have been carried on or conducted, or the powers of its directors are or have been exercised in a manner that is oppressive, or unfairly prejudicial to or unfairly disregards the interests of minority security holders in the following particulars:

a) It appears that the company prematurely redeemed a substantial amount of its debt during 1992, when its financial circumstances were such that it needed to conserve its cash resources. These facts are set out in paragraphs 11.02 to 11.03 below.

b) The company repurchased 5% of certain outstanding preferred shares in July of 1992 at a time when it needed to conserve its cash resources. These facts are set out in paragraphs 11.04 below.

c) The company continued to pay out dividends throughout 1992, when it needed to conserve its cash resources. These facts are set out in paragraphs 11.05 below.

d) The company failed to call upon the standby facility which was purportedly available under all market conditions. The defendant directors, at the behest of the controlling shareholder defendants terminated the standby facility. These facts are set out in paragraphs 11.06 to 11.07 below.

e) The company purchased or allowed the retraction of virtually all of Series F Preferred shares throughout the fall of 1992 and the spring of 1993, at a time when it needed to conserve its cash resources. These facts are set out in paragraphs 11.08 to 11.10 below.

f) Serious conflicts of interest arose due to the existence of outstanding management share purchase loans. These facts are set out in paragraphs 11.11 below.

11.11 The plaintiff repeats the allegations contained in paragraphs 10.07(b) and (l) with respect to outstanding MSPP loans to the management defendants and director defendants. With respect to management loans and other agreements, the following questions, requiring an investigation pursuant to sections 229 and 230 of the Canada Business Corporations Act, R.S.C. 1985 c. C-4 arise:

a) Did those in management with a personal stake in the outcome of the proposed transaction act in the best interests of the company's stakeholders generally?

b) Was there full, fair and timely disclosure of the MSPP loans? Was there adequate and timely disclosure of formal or informal commitments not to call these loans while the shares were "under water"?

c) Did any of the directors have an indemnification agreement with any of the controlling shareholder defendants or any of their affiliates or parent corporations in the Hees-Edper Group?

d) Did the MSPP loan arrangement in the Plan or Arrangement in effect force the trustees of the MSPP to vote in favour of the Plan of Arrangement regardless of the fairness of the Plan of Arrangement?

e) Did any of the director defendants or management defendants receive bonuses, severance remuneration or other consideration as a result of the Plan or Arrangement?

12.01 The plaintiff repeats the facts and circumstances relating to the existence of the Standby Facility contained in paragraphs 10.07(g) and 11.06 to 11.07 herein. The said facility should have been available under all market conditions to meet the capital requirements of the company, up to a maximum of $1 billion. The company required access to this capital in order to replace the losses suffered throughout 1991 and 1992, however the director defendants, and the management defendants failed or refused to cause the company to access the Facility. The plaintiff pleads that the controlling shareholder defendants refused to allow the company to access the Facility when it was most needed.

12.04 The plaintiff states that the circumstances under which the Standby Facility was terminated, and the failure or refusal to access the Standby Facility constitutes acts or omissions by the director defendants, management defendants and controlling shareholder defendants which effected a result, or were such that the business or affairs of the corporation or its affiliates were carried on or conducted in a manner, or in the case of the director defendants were powers of directors that were exercised in a manner that were oppressive, unfairly prejudicial or unfair in respect of the interests of the minority shareholders of the company.

12.05 In March, 1993, the management defendants, controlling shareholder defendants and the director defendant were advised and were aware that another financial institution was interested in pursuing to make an investment in, or purchasing the operating assets of the company. The identity of this financial institution is presently unknown to the plaintiff, but is known to these defendants. The company entered into an exclusivity arrangement with the Royal Bank, which prevented this financial institution, along with other interested purchasers, from completing its due diligence, and bidding on the purchase of the company's operating assets with the Royal Bank, and thus protecting the value of the shares for shareholders. The actions of these defendants in this regard unfairly disregarded the interests of minority shareholders.

Plaintiff's Position and my Initial Views

5 The plaintiff's position was maintained as:

(a) there are sufficient facts pleaded as against these defendants to constitute a cause of action for oppressive, prejudicial or unfair conduct pursuant to section 241 of the CBCA as against the interests of the plaintiff, and the classes or persons whom he represents;

(b) it is not "plain and obvious" that the cause of action pleaded against these defendants cannot possibly proceed;

(c) neither the length or complexity of the issues, the novelty of the cause of action nor the potential for the defendants to present a strong defence should prevent this plaintiff from proceeding with this case;

(d) Rule 25.06(8) provides that malice, intent or knowledge may be alleged as a fact without pleading the circumstances from which it is to be inferred. Particulars of such claims are not necessary because it will come from production and discovery as to the subjective knowledge of the defendants and thus are not to be available to the plaintiffs at the time of pleading;

(e) The material facts upon which the plaintiff relies to establish his cause of action for oppressive, prejudicial or unfair conduct as against his interests as a security holder or former security holder of Royal Trustco (now Gentra) are concisely pleaded.

As seen above the plaintiff may no longer plead "malice" or "intent" without pleading the circumstances from which it is to be inferred. The plaintiff went on to say in (d) that "particulars of such claims are not necessary because it will come from production and discovery as to the subjective knowledge of the defendants and thus are not be available to the plaintiffs at the time of pleading." One might have thought generally that the plaintiff might wish to press for an investigation which, if granted, might well provide not only concerned shareholders but also the public (including regulators) with some answers as to Gentra's rapid "almost demise". It is possible that a report may assist with further legal proceedings, if same are deemed warranted. Such a process might assist in focusing attention; it would undoubtedly husband financial resources for legal activities. In my oral reasons given August 30, 1993 approving the arrangement whereby the Royal Bank of Canada in effect rescued the "ordinary" business operations of Gentra, I said at pp. 3-5:

The only person who filed a notice of opposition against the approval was Raymond Budd, who has waged a campaign in the name of "The Royal Trustco Committee of Public Shareholders." It may have been in the past difficult to say exactly what the campaign was against. It is, of course, obvious that with the applicant's sudden fall - a tumble that looked like it was a death spin - there was a very large and a deep well of emotions and concern to deal with .... I would underline that I mean no disrespect to anyone who has indicated support of whatever nature for this Committee by my choice of categories. It certainly seems obvious that they have suffered greatly in the sudden plummet of the share prices. Rather I think it a comment addressed to those who would seek to organize those shareholders. I think it incumbent on them to do so on an in fact organized way. These shareholders would seem to well deserve that.

I went on to say at pp. 7-8:

The responses obtained by the Committee appear to fit into a number of general categories, from my review of all of the documentation that was presented to me:

(a) Distress that the share prices fell so far and so quickly without much advance warning.

(b) Action should be taken against certain persons or corporations, including the Board of the applicant or members of its management team or its controlling shareholder, as to either general concerns or specific ones such as the Trilon one billion dollar standby arrangement.

It is with respect to this last category (c) that the Committee now finds itself advancing a flag of battle. It appears common ground by everyone that there is no option to the Royal Bank deal - a life boat of any kind is desired once the Titanic has hit the iceberg, since no one wants to go down with the ship. As to the other aspects of (a) and (b), this arrangement approval hearing is not the appropriate forum for these concerns, no matter how legitimate they may be.

I concluded at pp. 30-1:

On balance I am satisfied that the Arrangement is fair and reasonable and that an order approving it should issue generally in the form set out in the application record. It does not seem to me that such approval by the Court would preclude any interested party from pursuing other litigation as to non-affected rights as set out in that order. Similarly, if anyone were to afterwards determine that there was evidence to support a claim that the M.S.P.P. condition was obtained on a phoney basis (although there is nothing in the material which would appear to support that conclusion), I would not think that this approval would preclude that litigation from being pursued. I would, however, suggest that anyone who determines to pursue that question, do so only after calmly reviewing the situation and not quickly or irrationally. In this regard, it appears that a very considerable amount of time and energy was expended on concern (c); it would seem that if there had been reflection, such would have been better deployed in analyzing generally the causes of concern (a) and seeing if there were ramifications for concern (b).

The plaintiff asserts that the following issues arise with respect to the defence motions:

(i) What is the test under Rule 21.01(1)(b) for striking out a pleading on the ground that it discloses no reasonable cause of action or defence?

(ii) What is the test under Rule 25.11 for striking out all or part of a pleading without leave to amend?

(iii) What constitutes a cause of action for a remedy under section 241 of the CBCA, as amended?

iv) Who are the proper parties to an action under section 241 of the CBCA, as amended?

Test As To Rule 21.01(1)(b) Strike Out Pleading On Ground It Discloses No Reasonable Cause of Action

6 Please see my views as to test to be employed on such a strike out motion under rule 21.01(1)(b) as set forth in Roman Corp. Ltd. v. Peat Marwick Thorne ("Roman I") (1992), 11 O.R. (3d) 248 (Gen. Div.) at pp. 252-4. See also R.D. Belanger & Associates Ltd. v. Stadium Corp. of Ontario Ltd. (1991), 5 O.R. (3d) 778 (C.A.) at p. 782 where Finlayson J.A. for the Court stated: "Matters of law which have not been settled fully in our jurisprudence should not be disposed of at this stage of the proceedings." As Carthy J.A. said for the majority in Prete v. Ontario (1993), 16 O.R. (3d) 161 (C.A.) at p. 168, we should not confuse a rule 21 motion in which the facts as alleged must be taken as true with a rule 20 motion for summary judgment which is to determine if there is a genuine issue for trial after having had the benefit of sworn evidence of the parties to the litigation. Finlayson J.A. for the Court in Hanson v. Bank of Nova Scotia (1994), 19 O.R. (3d) 142 (C.A.) at p. 145 stated: "The threshold for sustaining a pleading under rule 21.101(1)(b) is not a high one." However a rule 21.01(1)(b) motion is a useful tool to remove unnecessary and inappropriate parties or to expeditiously conclude litigation where the case fails on a key legal principle: for example see Edgewater Construction Ltd. v. N.D. Lea & Associates Ltd., [1993] 3 S.C.R. 206 and Caparo Industries plc v. Dickman and others, [1990] 1 All E.R. 568 (H.L.). In theory such a motion enables the parties (and the court) to avoid the time and expense of unnecessary litigation. In practice however there may follow a series of appeals (even if there is leave to amend the pleadings): see Roman I, supra at pp. 253-4 where I observed: "I pause to note here that this was not the first emanation of McGauley to reach the courts. As indicated previously, a strike out motion may not necessarily end the war." Then of course in Roman I where I gave leave to amend the pleadings, the parties were back before me on a strike out motion in Roman Corp. Limited v. Peat Marwick Thorne ("Roman II") (1993), 12 B.L.R. (2d) 10 (Ont. Gen. Div.) and I understand that my decision in Roman II is under appeal. In both Montreal Trustco of Canada v. Scotia McLeod Inc. (1994), 15 B.L.R. (2d) 160 (Ont. Gen. Div.) at p. 205 and National Trust Co. v. Furbacher, [1994] O.J. No. 2385 (Gen. Div.) at para. 51 indicated I had considerable sympathy and empathy for the views expressed by Slade L.J. in C. Evans & Sons Ltd. v. Spritebrand Ltd. and another, [1985] 2 All. E.R. 415 (C.A.) at p. 424:

The authorities, as I have already indicated, clearly show that a director of a company is not automatically to be identified with his company for the purpose of the law of tort, however small the company may be and however powerful his control over its affairs. Commercial enterprise and adventure is not to be discouraged by subjecting a director to such onerous potential liabilities. In every case where it is sought to make him liable for his company's torts it is necessary to examine with care what part he played personally in regard to the act or acts complained of. Furthermore, I have considerable sympathy with judges, particularly when dealing with commercial matters, who may be anxious to avoid or discourage unnecessary multiplicity of parties by the joinder of directors of limited companies as additional defendants in inappropriate cases. As counsel for the appellant emphasised, the very fact of such joinder could in some cases operate to put unfair pressure on the defendants to settle. In some instances, where the joinder is demonstrably a mere tactical move, a striking out application may well be justified.

See also the views of Ground J. in Aspiotis v. Coffee Time Donuts Inc., [1995] O.J. No. 419 (Gen. Div.) at para. 14, after of course a trial.

7 The question then for a rule 21 strike out motion is whether there is in fact a radical defect in the statement of claim such that the plaintiff trips over the very low threshold hurdle. It must be a defect which would not permit the plaintiff at law to succeed. As Carthy J.A. pointed out in Prete at pp. 169-70, it is not to be a judicial determination of whether there is no likelihood of success at trial; it is not enough that the case appears to be hopeless. Of course, there may be differences in the nature of the defect if such is found in a pleading: contrast the situation where the defect comes about because of a material fact having been omitted from the pleading to the situation where all the material facts have been pleaded but they still do not add up to a cause of action. One would trust that instances of the former would be resolved informally with a consent amendment. As to the latter situation one would hope that instances which reach the court would be restricted to those in the grey area of possible novelty of claim.

8 The last aspect of the test to consider is whether pleadings involving a novel cause of action should be struck out and if so under what circumstances. Wilson J. for the Court in Hunt, supra at p. 336 stated:

Neither the length and complexity of the issues, the novelty of the cause of action, nor the potential for the defendant to present a strong defence should prevent the plaintiff from proceeding with his or her case. [Emphasis added]

Finlayson J.A. in Hanson, supra at p. 145 endorsed that view in saying:

It is also accepted that the fact that a cause of action could be a novel one is not a bar to its proceeding to trial: see Hunt v. Carey Canada Inc. [1990] 2 S.C.R. 959; 74 D.L.R. (4th) 321.

However it would seem to me that this statement should be put in context. In this regard see what Finlayson J.A. said immediately after the above quote:

The categories of relationships giving rise to fiduciary duties are not closed nor are the categories of negligence in which a duty of care is owed: see Guerin v. R., [1984] 2 S.C.R. 335 at p. 383, 13 D.L.R. (4th) 321 at p. 341; International Corona Resources Ltd. v. LAC Minerals Ltd., [1989] 2 S.C.R. 574 at pp. 596-97, 61 D.L.R. (4th) 14 at p. 61, and 34 Halsbury's Laws of England, 4th ed. (1980), para. 5 at p. 8.

This would appear to be in direct reference to what appeared to be what would be the radical defect as proposed by the defendant Oslers moving to strike: see at p. 145 as well:

The respondent Osler submits that the facts as pleaded do not create, as between Osler and Telfer's, a fiduciary relationship that is now known to the law and accordingly, Telfer's cannot assert a claim against Osler for breach of confidence. The respondent also submits that the facts as pleaded do not create a duty of care by Osler to Telfer's as would form the basis of an action in negligence.

It would seem to me that the causes of action in both instances were established and known; they were not novel. Rather the novelty would appear to relate in that case as to whether there was a new type of fiduciary relationship revealed or a new category of negligence.

9 Let me assume however that the cause of action is novel (in the sense that it has never been considered by any court whose jurisprudence is to be taken by our courts). Does this entitle the plaintiff to defeat a rule 21 strike motion on that basis alone? I must confess that I do not see the logic or practicality of agreeing with that as a proposition of law. The plaintiff's case must be taken as being at its very best and specifically all facts alleged must be taken as true. The fight has not be sullied or muddied by the defendant having raised his own defences or by advancing different facts to take into consideration (either in addition to or in correction). In theory and I suspect in practice what better time to see if the plaintiff has discovered a new cause of action. If he has then the case will proceed on that basis and it will remain to be seen whether the evidence adduced applied to that law will allow the plaintiff a victory. If it is determined that the plaintiff has not discovered a new cause of action, then it will not be necessary to proceed further. Of course it goes without saying (almost) that in many situations, either the unsuccessful defendant or the unsuccessful plaintiff in a strike motion will appeal until the appeal route is exhausted. I also think it important to consider what was being cautioned: novelty is not a bar to proceeding - but there still must be established that, no matter how novel the cause of action may be that is pleaded, it is nevertheless still a valid cause of action, albeit the first of its kind. If I were to conclude otherwise, then it would seem on the basis of the doctrine of stare decisis that it would be up to a (determined) defendant to appeal anything which is said by the plaintiff to be a novel cause of action (and thereby on that theory given an automatic pass in the lower courts) through to the Supreme Court of Canada to see whether or not it is, as advertised, a cause of action.

10 I have reviewed this area at some length because of what the plaintiff claims is a proper interpretation of s. 241 of the CBCA and which appears to me to get us into an aspect of novelty.

11 I also note the comment of Chadwick J. in Armstrong v. R.J. Nichol Homes, Ltd., [1993] O.J. No. 620 at pp. 9-10 in dismissing a rule 21.01(1) strike out motions by the defendants:

A word by word, paragraph by paragraph, attack by the defendants of the plaintiffs' statement of claim, after they have filed defences, is not the purpose of Rule 21.01. The rule is a helpful and useful rule in disposing of those cases which have no merit upon their face and therefore do not justify defendants being put to the expense of filing pleadings. The application before me would have been more properly brought under the summary judgment rule 20.

Test Under Rule 25.11 For Striking Out All Or Part of A Pleading (As Impacted By Rule 25.06)

12 In Prete, supra Carthy J.A. said at p. 170:

Weiler J.A. has concluded that rule 25.11(c) which provides for striking out a pleading which is "an abuse of the process of the Court" permits the Court to look beyond the pleading and determine if the action has any chance of success. She finds support for that approach in German v. Major (1985), 20 D.L.R. (4th) 703, 24 C.C.L.T. 257 (Alta. C.A.). It is my opinion that you cannot escape Rule 21 in this case by looking at Rule 25.11(c) because if you consider the statement of claim to be an abuse of the process of the Court it can only be because it discloses no reasonable cause of action. If that is the true complaint then it must be tested under the specific language of Rule 21.01(1)(b) and, as stipulated in that same rule, no evidence is admissible on the motion.

However in that case Weiler J.A. stated at pp. 172-3:

For ease of reference, the relevant portions of rules 21.01 and 25.11 are reproduced below:

21.01(2) No evidence is admissible on a motion,

[(a) under clause (1)(a), except with leave of a judge or on consent of the parties;]

(b) under clause (1)(b)

(3) A defendant may move before a judge to have an action stayed or dismissed on the ground that,

(d) the action is frivolous or vexatious or is otherwise an abuse of the process of the court,

and the judge may make an order or grant judgment accordingly.

25.11 The Court may strike out or expunge all or part of a pleading or other document, with or without leave to amend, on the ground that the pleading or other document,

(a) may prejudice or delay the fair trial of the action;

(b) is scandalous, frivolous or vexatious; or

While Weiler J.A. set out rule 25.11 she does not appear to have otherwise directly dealt with it although under the heading "(b) Does the Statement of Claim Plead the Necessary Facts?" she refers at pp. 176-7 to a federal court case involving similar federal court rules. However what one must appreciate is that rule 21.01(3)(d) deals with whether the action is frivolous or vexatious or otherwise an abuse of the process of the court, whereas rule 25.11(b) and (c) deal with whether the pleadings (or other document) is scandalous frivolous or vexatious or is an abuse of the process of the court. It would therefore seem to me that a moving party may proceed by way of either rule (or both) but in either case the moving party must demonstrate that the test for each rule has been met. In the case of rule 25.11, pursuant to the philosophy of Unterreiner v. Wilson (1982), 40 O.R. (2d) 197 (H.C.) affirmed (1983), 41 O.R. (2d) 472 (C.A.) the allegations of fact in a pleading must be taken as true or at least capable of being proved.

13 I have discussed defective pleadings in Furbacher (No. 1), supra as well as in National Trust & Furbacher (No. 2), [1995] O.J. No. 3566.

14 The plaintiff's complaint is grounded in s. 241 CBCA that the security holders or former security holders of Gentra have been dealt with in a way that is oppressive, unfairly prejudicial or unfairly disregards their interests as a result of actions (or omissions) of the defendants. There is no statutory requirement of having to show bad faith: see Brant Investments Limited v. Keep-Rite Inc. (1991), 3 O.R. (3d) 289 (C.A.) at pp. 302-11; 820099 Ontario Inc. v. Harold E. Ballard Limited (1991), 3 B.L.R. (2d) 113 (Ont. Div. Ct.) affirming Ont. Gen. Div. at p. 123. In light of that discussion in Brant, it would not seem to me that the amendment to rule 25.06(8) to require malice and intent to be pleaded only by setting out the circumstances from which it is to be inferred is of no particular assistance here to the defendants since the pleading while negatively cast towards the defendant officers does not refer to malice. Where intent was pleaded, it appears to have been pleaded somewhat ambiguously. It would appear that the only positive pleading of intent against the Defendant Directors was para. 12.01 where the plaintiff stated:

12.01 ... The company required access to this capital in order to replace the losses suffered throughout 1991 and 1992, however the director defendants, and the management defendants failed or refused to cause the company to access the Facility. The plaintiff pleads that the controlling shareholder defendants refused to allow the company to access the Facility when it was most needed.

While the plaintiff balanced "refused" with "failed" it would appear to me that under the new rule 25.06(8), that he must plead the circumstances from which it can be shown that intent (in the "refused" context) may be inferred. Leave to amend under Rule 25.11 should only be refused in the clearest of cases: see Lido Industrial Products Ltd. et al. v. Exbar Properties Inc. et al. (1988), 28 O.A.C. 385 (Div. Ct.) at para 9. This is not one of those clearest of cases; thus leave is granted on that aspect.

What Constitutes a Cause of Action For Remedy Under s. 241 CBCA?

15 The statute itself creates a cause of action to allow a complainant (which the plaintiff would qualify for as a registered holder or former registered holder of Gentra shares) to demonstrate to a court that:

[241(2)] ... in respect of a corporation or any of its affiliates

(a) any act or omission of the corporation or any of its affiliates effects a result,

(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or

16 It is appropriate to note that the plaintiff's statement of claim is based entirely upon s. 241 (aside from the interim relief requested pursuant to s. 229 for an investigation, as bolstered by s. 241(3)(m)). Specifically the plaintiff wants an order pursuant to s. 241 for a declaration that:

(a) the acts and omissions of the respondents have effected a result;

(b) the business or affairs of the respondent Gentra Inc. (formerly Royal Trustco) have been conducted in a manner; or

(c) the powers of the directors of Gentra Inc. (formerly Royal Trustco) have been exercises in a manner that is oppressive, unfairly prejudicial to or unfairly disregards the interests of the class of security holders or former security holders represented by the applicant, (being past or present security holders of Royal Trustco Limited, now Gentra Inc., and who are members of the Litigation Committee of Public Shareholders of Royal Trustco).

Then using a combination of s. 241(3)(f)(g) and (j),

[In connection with an application under this section the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

...

(f) an order directing the corporation, subject to subsection (6), or any other person to purchase securities of a security holder;

(g) an order directing a corporation, subject to subsection (6), or any other person to pay to a security holder any part of the moneys paid by him for securities;

...

(j) an order compensating an aggrieved person.] [Emphasis added]

the plaintiff requests that the court order the defendants to purchase Gentra shares held by persons who will be represented by the plaintiff if the class is certified for the original purchase price or compensate them for any loss suffered on a sale after March 18, 1993 or otherwise compensate them. While it is true that the oppression (oppressive, unfairly prejudicial or unfairly disregards) remedy is a very broad one (which is clear from the fact that s. 241(3) allows judicial discretion to fashion the appropriate remedy and merely gives some non-exclusive suggestions), it seems to me to place the cart before the horse if one concentrates on remedies and ignores the "cause of action" aspect which is s. 241(2). Quite clearly if there is no conduct which infringes any of s. 241(2)(a), (b) or (c), then that is the end of the matter - no remedy will be given. The cause of action must be found within s. 241(2) - not within s. 241(3) or be read in even if not specifically set forth (see my views in PMSM Investments Ltd. v. Bureau (1995), 25 O.R. (3d) 586 (Gen. Div.), especially at p. 593).

17 In Montreal Trust Co. of Canada v. Scotia McLeod Inc. (1995), 129 D.L.R. (4th) 711 (Ont. C.A.) Finlayson J.A. summarized as follows at pp. 720-1:

The decided cases in which employees and officers of companies have been found personally liable for actions ostensibly carried out under a corporate name are fact-specific. In the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers, they are also rare. Those cases in which the corporate veil has been pierced usually involve transactions where the use of the corporate structure was a sham from the outset or was an afterthought to a deal which had gone sour. There is also a considerable body of case law wherein injured parties to actions for breach of contract have attempted to extend liability to the principals of the company by pleading that the principals were privy to the tort of inducing breach of contract between the company and the plaintiff: see Ontario Store Fixtures Inc. v. Mmmuffins Inc. (1989), 70 O.R. (2d) 42, 16 A.C.W.S. (3d) 426 (H.J.C.), and the cases referred to therein. Additionally there have been attempts by injured parties to attach liability to the principals of failed businesses through insolvency litigation. In every case, however, the facts giving rise to personal liability were specifically pleaded. Absent allegations which fit within the categories described above, officers or employees of limited Companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own.

None of the conduct alleged against the respondent directors falls within the broad categories I have outlined above. Their exposure, if there is any, is narrowly focused on their formal decision-making in the name of Peoples. A corporation may be liable for contracts that its directors or officers have caused it to sign, or for representations those officers or directors have made in its name, but this is because a corporation can only operate through human agency, that its, through its so-called "directing mind". Considering that a corporation is an inanimate piece of legal machinery incapable of thought or action, the court can only determine its legal liability by assessing the conduct of those who caused the company to act in the way that it did. This does not mean, however, that if the actions of the directing minds are found wanting, that personal liability will flow through the corporation to those who caused it to act as it did. To hold the directors of Peoples personally liable, there must be some activity on their part that takes them out of the role of directing minds of the corporation. In this case, there are no such allegations.

I see no reason why these corporate law principles (which in Montreal Trust, supra were considered in a negligent misrepresentation context) do not equally apply in an oppression case. See also my views as to the Ontario legislation oppression section in Ballard, supra where I stated at p. 181

Section 247 does not have a life of its own; it must be interpreted in light of the overall corporate legislation and case law. Section 247 can be a help; it can't be the total law with everything else ignored or completely secondary. In other words, there must be some interplay between directors' fiduciary duties generally and s. 247.

It would appear to me that it would be inappropriate to allow someone to baldly plead oppression and thereby circumvent the principles with respect to personal liability of directors and officers. It would not appear to me the plaintiff in his pleading does other than treat the officers and directors as a group(s). When questioned about the lack of definition as to the acts of the various personal defendants, counsel for the plaintiff submitted that each was acting in lock step with all of the others as to each and every matter. I would think that upon appropriate reflection the plaintiff will appreciate that such an allegation would seem unusual and quite aggressive. It should be greeted in the same way that an allegation that it snowed in Toronto one July 14th would be treated - it may have happened once since records were kept but should not be regarded as the usual course of events.

18 In para. 10 and following of the statement of claim the plaintiff pleads that the directors and officers had a fiduciary duty to security holders to ensure that Gentra made proper disclosure. However it would appear that absent the pleading of special circumstances which would give rise to a relationship of trust, confidence and reliance, these defendants owe their fiduciary duties to the corporation - Gentra. See Hodgkinson v. Simms (1994), 117 D.L.R. (4th) 161 (S.C.C.) at pp. 176-7 and Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574 at pp. 598-9 as to fiduciary relationships generally and Brant, supra at p. 301 as to the specifics of directors. In Brant McKinley J.A. for the Court said there:

It is clear that none of the foregoing authorities imposes a fiduciary duty on majority shareholders or directors in favour of minority shareholders. The case that comes closest to doing so is the Goldex Mines case, which was decided prior to the coming into force of the CBCA in December of 1975, and involved facts which, if they arose at the present time, would appropriately lead to an application under s. 234 of the CBCA or its counterpart, s. 247(2) of the Ontario Business Corporations Act, 1982 S.O. 1982, c. 4 (the OBCA). The enactment of these provisions has rendered any argument for a broadening of the categories of fiduciary relationships in the corporate context unnecessary and, in my view, inappropriate.

It must be recalled that in dealing with s. 234, the impugned acts, the results of the impugned acts, the protected groups, and the powers of the court to grant remedies are all extremely broad. To import the concept of breach of fiduciary duty into that statutory provisions would not only complicate its interpretation and application, but could be inimical to the statutory fiduciary duty imposed upon directors in s. 117(1) (now s. 122(1)) of the CBCA. That provision requires that

117(1) Every director and officer of a corporation in

exercising his powers and discharging his duties shall

(a) act honestly and in good faith with a view to the best interests of the corporation ...

(Emphasis added)

Acting in the best interests of the corporation could, in some circumstances, require that a director or officer act other than in the best interests of one of the groups protected under s. 234. To impose upon directors and officers a fiduciary duty to the corporation as well as to individual groups of shareholders of the corporation could place directors in a position of irreconcilable conflict, particularly in situations where the corporation is faced with adverse economic conditions.

It seems to me as well that it would have to be specifically pleaded that individual defendants took a direct, active and significant involvement in making the misrepresentation (in this regard a failure to disclose could be analyzed as a misrepresentation by omission as opposed to the usual misrepresentation by commission). It may be desirable to determine if there is any statutory duty upon officers or directors to make (timely) disclosure.

19 As to the question of the claims against E&Y, they appear to focus on the aspect of paras. 10.08 (failing in its duties to minority shareholders to ensure that the financials for 1990 and 1991 were free from material misstatement) and 10.09 (failure to ensure full, frank and timely disclosure of material information). However an auditor in an ongoing audit arrangement with a corporation owes its duty to the corporation and not to any individual (or minority) shareholders: see Roman I; Roman II; Caparo, supra; Haig v. Bamford [1977] 1 S.C.R. 466; Twiggco Financial Limited v. Peat Marwick Thorne (1994), 12 B.L.R. (2d) 1 (Ont. Gen. Div.). There was no allegation that E&Y was advised that its reports would be relied on to make investments in Gentra.

20 The business and affairs of the corporation are to be managed by its directors absent a unanimous shareholder agreement: see Re Royal Trustco Ltd. (No. 3) (1981), 14 B.L.R. 307 (Ont. S.C.) at p. 315. Section 2(1) of the CBCA defines "affairs":

"affairs" means the relationships among a corporation, its affiliates and the shareholders, directors and officers of such bodies corporate but does not include the business carried on by such bodies corporate.

It would not appear to me that auditors of a corporation qua auditors could fit within the pigeon holes of s. 241(2)(a), (b) or (c). Unless they were to take over de facto control of the corporation, they could not commit an act or omission of the corporation. Similarly auditors do not carry on the business of a corporation; and by definition of "affairs", they are not part of that relationship. Lastly they do not exercise the powers of the directors.

21 It would seem to me that the moving party defendants are entitled to the strike relief which they sought. It was urged upon me that the plaintiff not be given further leave to amend given the prior chance to do so when he converted his application into an action as a result of my earlier decision. I would think that the plaintiff was tactically pleading with such bald assertions -- that is to be vigorously discouraged. However I see no reason why the plaintiff should not have another chance to clean up his pleadings. He might do well to concentrate only upon what he specifically knows and advocate the appointment of a person to conduct an investigation under s. 229 and s. 241(3)(m). If an investigation is ordered, it may well be that the ensuing report will materially assist the plaintiff to focus his claims against specific defendants and avoid the difficulties and unfairness of blanket and bald pleading, such as we have at present. I would therefore grant leave to amend; unless I am otherwise advised as to material difficulties in doing so by September 30, 1996, I would set a deadline for such revised pleading of December 31, 1996.

22 The plaintiff is to pay costs forthwith of $7,500 to the Defendant Directors, $7,500 to the Defendant Officers and $2,500 to E&Y.

FARLEY J.

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