Nevsun Resources Ltd. v. Delizia Limited

Nevsun Resources Ltd. v. Delizia Limited
Court (s) Database
Federal Court Decisions
Date
2016-04-08
Neutral citation
2016 FC 393
File numbers
T-1157-13
Decision Content
Date: 20160408
Docket: T-1157-13
Citation: 2016 FC 393
Ottawa, Ontario, April 8, 2016
PRESENT: The Honourable Mr. Justice Brown
BETWEEN:
NEVSUN RESOURCES LTD.
Appellant/Garnishee
and
DELIZIA LIMITED
Respondent/Garnishor
and
STATE OF ERITREA
Respondent
JUDGMENT AND REASONS
I. Nature of the Matter, Outline of Proceedings, and Summary of Disposition [1] This is a motion appeal from the decision of Prothonotary Morneau [Prothonotary] dated January 9, 2015, which granted a final garnishment order in favour of the judgment creditor Delizia Limited [Delizia or the Respondent] against the garnishee, Nevsun Resources Ltd. [Nevsun or the Appellant] in respect of amounts allegedly owed by Nevsun to the judgment debtor, the State of Eritrea [Eritrea].
[2] Delizia obtained an arbitral award against Eritrea. Subsequently, Delizia moved ex parte to register that award in this Court, for the purposes of enforcement, which registration was granted on July 17, 2013. Upon further ex parte motion, the Prothonotary granted Delizia a provisional order of garnishment [technically a Garnishee Order to Show Cause, but for consistency with the Order under appeal, hereinafter referred to as Nevsun POG] against Nevsun dated July 31, 2013. After a hearing with notice and having heard from both Nevsun and Delizia, the Prothonotary granted Delizia a final Order of Garnishment [Nevsun FOG] against Nevsun on January 9, 2015, which is the subject of this appeal. Justice Kane stayed the Nevsun FOG pending this appeal by Order dated July 31, 2015.
[3] The appeal was heard together with an appeal brought by another garnishee also named by Delizia, namely Sunridge Gold Corporation [Sunridge]. Both the Nevsun matter and the parallel Sunridge matter proceeded in this same Court file but have been separately argued and are dealt with separately here and below. This Judgment deals only with the Nevsun matter; the Sunridge appeal is dealt with separately in this Court file.
[4] The appeal is allowed and both the Nevsun POG and the Nevsun FOG are set aside. In summary, and in my respectful opinion, there are no debts owing or accruing by Nevsun to Eritrea and or its alter ego, Eritrea National Mining Corporation [ENAMCo], and therefore, there is nothing to which a garnishment order may attach. The corporate veil may not be pierced in the circumstances of this case. Moreover, both the Nevsun POG and FOG are nullities because of non-compliance with the mandatory requirement to serve Eritrea imposed by the State Immunity Act, RSC 1985, c S-18 [SIA]. No final order of garnishment may be granted in this case. For these and other reasons, the appeal against the Nevsun FOG must be allowed. Therefore, it is not necessary to deal with the production orders; however if it were, I would allow the appeal against them as well.
II. Facts A. Contract between Delizia and Eritrea, Default and Arbitral Award [5] Delizia, a Cyprus-based company, entered a contract to sell military aircraft equipment to Eritrea in 2003. Eritrea did not pay an amount owing. Pursuant to the terms of their contract, Delizia proceeded to arbitration against Eritrea before the Arbitration Institute of the Stockholm Chamber of Commerce [AISCC]. Although Delizia filed extensive materials with the arbitration tribunal, Eritrea did not fully engage with these proceedings and eventually decided not to participate further.
[6] The duly convened arbitration tribunal of the AISCC awarded Delizia [Arbitral Award] $2,175,775 US on April 18, 2006, with 6% interest accumulating as of January 31, 2005, as well as arbitrator fees with interest accumulating as of April 18, 2006. This award totaled $4,062,428.70 CA as of the date of registration of the foreign judgment in this Court.
[7] The validity of the Arbitral Award is not in dispute.
B. Nevsun and the Bisha Mine in Eritrea [8] Nevsun was incorporated in 1965 under the laws of British Columbia. Nevsun is a Canadian publicly-traded company listed on both the Toronto Stock Exchange and the New York Stock Exchange.
[9] Nevsun’s corporate structure was created before 2000, i.e., well before the events at hand. There are three foreign-incorporated and wholly-owned subsidiaries of Nevsun (Nevsun (Barbados) Holdings Ltd., Nevsun Africa (Barbados) Ltd. and Nevsun Resources (Eritrea) Ltd.) interposed between Nevsun itself and the operating mining company, Bisha Mining Share Company [BMSCo].
[10] Neither Nevsun nor any of the subsidiaries have ever had any dealings with Delizia; they are complete strangers to the contract between Eritrea and Delizia.
[11] BMSCo owns mining property located in Eritrea known as the Bisha Mine. BMSCo was incorporated in 2006 to formally establish a joint venture between Nevsun and the State of Eritrea through its alter ego, ENAMCo. BMSCo was incorporated in compliance with, and in my view, to comply with Eritrean law, in particular Eritrea’s Proclamation 68/1995 (A Proclamation to Promote the Development of Mineral Resources). This Proclamation states that Eritrea may acquire a 10% interest in mining companies such as BMSCo, essentially on demand. This Proclamation further provides that Eritrea may acquire additional equity by agreement, and in this case, Eritrea acquired an additional 30% interest. This Proclamation also obliges mining licensees such as BMSCo to pay royalties in addition to taxes and licence fees.
[12] BMSCo, as the joint venture company, is 60% owned by Nevsun Resources (Eritrea) Ltd. The other 40% of BMSCo is owned by ENAMCo, an Eritrean state-controlled entity. ENAMCo holds both the original 10% and 30% interests referred to above. ENAMCo is the alter ego of Eritrea.
[13] This joint venture arrangement authorizes and in my view enables the lawful exploitation of the Bisha Mine in Eritrea in accordance with Eritrean law.
[14] Nevsun’s interest in the Bisha Mine and Nevsun’s inter-corporate holdings are summarized as follows:
[15] It is common ground that the only income-producing asset in the Nevsun corporate structure is the Bisha Mine in Eritrea. BMSCo is the sole owner of the Bisha Mine. BMSCo holds the Bisha Mine mining licences issued by Eritrea, and BMSCo conducts all mining operations. BMSCo generates revenue from the Bisha Mine operation. This revenue is used to fund payments to Eritrea and or ENAMCo in the form of royalties, taxes and licence fees. In addition, BMSCo pays dividends to Nevsun’s wholly owned subsidiary which owns 60% of the shares of BMSCo. These payments totalled over $300 million CA in 2012, the year before these proceedings began.
[16] Nevsun’s three intermediate wholly-owned subsidiaries are inactive and have no employees. All three have the same directors, including Mr. Clifford T. Davis, who is the CEO of Nevsun and Chairman of the Board of BMSCo.
C. Debts Owing or Accruing by Nevsun to Eritrea [17] There are debts owing and accruing by BMSCo to Eritrea both directly, and by BMSCo to ENAMCo, Eritrea’s alter ego.
[18] However, there are no debts owing or accruing by Nevsun to either Eritrea or to ENAMCo.
[19] Therefore, any liability of Nevsun for debts owing or accruing by BMSCo to Eritrea, may only arise through operation of law and in this case, may only arise if Delizia is able to persuade the Court to pierce the corporate veil that exists between Nevsun and BMSCo as separate legal personalities.
D. Legal history of proceedings (1) Delizia’s US garnishment proceedings [20] Upon Delizia’s successfully obtaining the Arbitral Award from AISCC against Eritrea (see paras 5 and 6 above), Delizia filed a Petition to Confirm Arbitration Award in a United States District Court in 2009, which granted default judgment on February 5, 2010. However, on March 2, 2012, a United States District Court judge ruled a final garnishment order could not be granted, because Delizia had not established that Eritrea was properly served with the default judgment as required under the Foreign Sovereign Immunities Act, 28 USC 97. The US Court also expressed concerns as to whether the property Delizia sought to garnish, was precluded from garnishment by the Vienna Convention on Diplomatic Relations.
(2) Delizia’s garnishment proceedings in Canada (a) Recognition Order [21] Delizia proceeded to institute this garnishment proceeding in the Federal Court. Delizia applied to register the Arbitral Award citing the United Nations Foreign Arbitral Awards Convention Act, RSC 1985, c 16 (2nd Supp). It did so by filing an ex parte Notice of Application to register a foreign judgment as defined by Rule 326 of the Federal Courts Rules, SOR/98-106 [the Rules], namely the Arbitral Award. Rule 326 enables parties to enforce garnishment orders against Canadian persons or organizations that have a debt owing or accruing to a judgment creditor.
[22] The materials and pleadings before the Court (on this ex parte motion) made no reference to mandatory service of originating court documents on foreign states as required by section 9 of the SIA.
[23] By Order dated July 17, 2013, this Court granted Delizia its requested ex parte registration Order [Recognition Order]. The Recognition Order recognizes the Arbitral Award thereby rendering it amenable to enforcement proceedings such as garnishment in this Court. The Recognition Order also provides that: “[t]he petitioner Delizia Limited is relieved of the requirement pursuant to Rule 334 and is hereby authorized to execute upon the present judgment without filing any proof of service of the present judgment upon the respondent State of Eritrea.”
(b) No service pursuant to the State Immunity Act [SIA] [24] Delizia did not serve Eritrea with the Recognition Order by the modalities set out in the SIA. The SIA subsection 9(2) sets out mandatory service requirements:
9 (2) For the purposes of paragraph (1)(c), anyone wishing to serve an originating document on a foreign state may deliver a copy of the document, in person or by registered mail, to the Deputy Minister of Foreign Affairs or a person designated by him for the purpose, who shall transmit it to the foreign state.
9 (2) La signification mentionnée à l’alinéa (1)c) peut se faire par remise personnelle ou par envoi recommandé d’une copie de l’acte introductif d’instance au sous-ministre des Affaires étrangères ou à la personne qu’il désigne; le sous-ministre ou cette personne transmet à son tour cette copie à l’État étranger.
[25] Eritrea was not served under the SIA before or after Delizia applied to obtain the Recognition Order. I point this out because, as discussed later, failure to serve Eritrea renders both the Nevsun POG and FOG nullities.
(3) Delizia obtains ex parte Nevsun provisional order of garnishment [Nevsun POG] [26] Having obtained the Recognition Order, Delizia applied, again ex parte, for a Provisional Order of Garnishment directed against Nevsun. The Prothonotary issued the Nevsun POG on July 31, 2013. This Order did two things. First, its garnishment component ordered “that any debts owing or accruing from the garnishee [i.e., Nevsun] to the respondent [i.e., Eritrea] be attached to answer the [Recognition Order].” Secondly, its show cause component ordered Nevsun to declare all sums owing or accruing by Nevsun to Eritrea and to show cause why Nevsun should not pay to Delizia the debts owed by Nevsun to Eritrea (“to say to the Court why it should not be paid to the applicant the debt due from it to the respondent or so much thereof as may be sufficient to satisfy the [Recognition Order]”).
[27] On the same day, the Prothonotary made a similar Provisional Order of Garnishment at Delizia’s request against Sunridge. This Judgment deals only with Nevsun. The Sunridge matter is dealt with separately in the same Court file.
(4) Nevsun final order of garnishment [Nevsun FOG] [28] Delizia served Nevsun with the Nevsun POG sometime before August 19, 2013, and applied to the Prothonotary for a Final Order of Garnishment under Rule 449 and following to garnish debts owing or accruing by Nevsun to Eritrea and or ENAMCo, Eritrea’s alter ego. Nevsun had notice of this proceeding and contested, asking that the motion for a Final Order of Garnishment be dismissed. Affidavits and exhibits were exchanged and cross-examinations conducted. Nevsun’s position was that only BMSCo and not Nevsun, had debts owing or accruing to Eritrea in respect of the BMSCo’s Eritrean mining operations.
[29] The Prothonotary found in favour of Delizia on January 9, 2015. He pierced the corporate veil and thereby found BMSCo’s liabilities to Eritrea and ENAMCo could be garnished by Delizia. He found it appropriate to pierce the corporate veil because BMSCo was “only the mere agent or puppet of Nevsun and that to conclude to the contrary, would yield a result for Delizia, which seeks to enforce the Judgment, that is too flagrantly opposed to justice”.
[30] The Prothonotary noted many courts do not follow the “too flagrantly opposed to justice” test for piercing the corporate veil, preferring instead a test relying on the extent of “control”, without more, the garnishee has over the company whose debts are to be attached. In this connection, the Prothonotary found Nevsun’s controlling interest in BMSCo enabled it in effect to have “complete control over BMSCo”, adding that nothing in the evidence rebutted that perception.
[31] The resulting Nevsun FOG ordered the attachment of all debts owing and accruing by Nevsun to Eritrea, including those to ENAMCo. It ordered Nevsun to answer the Recognition Order of July 17, 2013; it declared that Nevsun wrongfully failed to hold and to declare the debts owed to Eritrea as of July 17, 2013; and it ordered Nevsun to pay $4,371,618.47 CA, including accrued interest (to be perfected) for the benefit of Delizia.
[32] The Nevsun FOG does not discuss which debts owing or accruing by BMSCo to Eritrea or ENAMCo should be garnished and which are exempt as related to “commercial activity” under section 5 and paragraph 12(1)(b) of the SIA; the Nevsun FOG orders the attachment of “all debts”. However, the Prothonotary noted that Nevsun’s material refers to the following debts: “income taxes, stamp duties, withholding and other taxes, royalties, customs and duties, mining, exploration and business license fees”. It appears all were considered garnishable.
[33] The Nevsun FOG also ordered Nevsun to answer certain questions which are discussed in detail towards the end of these Reasons.
[34] Costs were awarded against Nevsun in favour of Delizia.
III. Issues [35] This matter raises the following issues:
1. What is the standard of review of the Prothonotary’s decision?
2. Should a Final Order of Garnishment issue in this case?
3. Did the Prothonotary err in ordering Nevsun to answer certain questions objected to in cross-examination?
IV. Analysis 1. What is the standard of review of the Prothonotary’s decision? [36] First, the Court must determine the nature of this appeal and the appropriate standard of review. I agree with Justice Beaudry who, citing well-established jurisprudence, held that where a prothonotary’s decision is determinative of the outcome, that is, if the order is vital to the final issue of the case, or is clearly wrong, the Court must review the decision de novo:
31. The principles that apply when deciding an appeal from a prothonotary's order were laid down in Canada v Aqua-Gem Investments Ltd [1993] 2 FC 425 [Aqua-Gem], and restated in Merck & Co Inc v Apotex Inc, 2003 FCA 488 [Merck & Co]. The criteria are set out at paragraph 19 of Merck & Co, where Justice Décary, writing on behalf of the Federal Court of Appeal, states as follows: . . . Discretionary orders of prothonotaries ought not be disturbed on appeal to a judge unless: (a) the questions raised in the motion are vital to the final issue of the case, or (b) the orders are clearly wrong, in the sense that the exercise of discretion by the prothonotary was based upon a wrong principle or upon a misapprehension of the facts. …
36. … The Court must therefore conduct an analysis de novo.
London Life, Compagnie d'assurance-vie (Re), 2013 CF 93 [London Life] at paras 31 and 36 (upheld at the FCA in London Life Insurance Company v Canada, 2014 FCA 106).
[37] Justice Beaudry in Corporation Steckmar, Re, 2004 FC 1568 [Steckmar] had earlier explained in a garnishment case, albeit under the Income Tax Act:
16 In Merck & Co. v. Apotex Inc., [2003] F.C.J. No. 1925 (F.C.A.), at paragraph 19, the Court explained the standard of review applicable to discretionary orders by prothonotaries. This standard had previously been developed in R. v. Aqua-Gem Investments Ltd., [1993] 2 F.C. 425 (Fed. C.A.).
17 It has been held that a judge hearing an appeal from a prothonotary's discretionary order should not intervene except in the following two cases:
(a) the order deals with a question vital to the final issue of the principal matter;
(b) the order is clearly wrong, in the sense that the exercise of discretion by the prothonotary was based upon a wrong principle or a misapprehension of the facts.
18 The effect of the prothonotary's order was that the garnishee was directed to pay the sum of $126,666.39. That surely is a question which is vital to the final issue of the principal matter. The Court must redo the analysis de novo in order to exercise its discretion.
[emphasis added]
[38] In my view, the Prothonotary’s discretionary order in this appeal of the Nevsun FOG is a matter vital to the final issue of the principal matter in the case. Indeed the FOG is the only issue in this matter. I therefore conclude this Court must redo the analysis on its own and determine if there are debts owing or accruing by Nevsun to Eritrea and or ENAMCo, that is, the Court must decide if a final order of garnishment should issue. I will also consider findings made by the Prothonotary.
[39] Different principles apply to the appeal concerning production orders to be dealt with later in these Reasons.
2. Should a Final Order of Garnishment issue in this case? (1) There is no debt owing by Nevsun to either Eritrea or ENAMCo: unless the corporate veil is pierced, there is nothing to attach [40] Delizia may only succeed if it establishes that there is a debt owing or accruing by Nevsun - as the proposed garnishee - either to Eritrea as judgment debtor or to ENAMCo as its alter ego: see Rule 449 of the Rules. For completeness, I set out the garnishment rule in its entirety, but see in particular subparagraph 449(1)(a)(i) and (ii):
Garnishment
Saisie-arrêt
449. (1) Subject to rules 452 and 456, on the ex parte motion of a judgment creditor, the Court may order
449. (1) Sous réserve des règles 452 et 456, la Cour peut, sur requête ex parte du créancier judiciaire, ordonner :
(a) that
a) que toutes les créances suivantes du débiteur judiciaire dont un tiers lui est redevable soient saisies-arrêtées pour le paiement de la dette constatée par le jugement :
(i) a debt owing or accruing from a person in Canada to a judgment debtor, or
(i) les créances échues ou à échoir dont est redevable un tiers se trouvant au Canada,
(ii) a debt owing or accruing from a person outside Canada to a judgment debtor, where the debt is one for which the person might be sued in Canada by the judgment debtor,
be attached to answer the judgment debt; and
(ii) les créances échues ou à échoir dont est redevable un tiers ne se trouvant pas au Canada et à l’égard desquelles le débiteur judiciaire pourrait intenter une poursuite au Canada;
(b) that the person attend, at a specified time and place, to show cause why the person should not pay to the judgment creditor the debt or any lesser amount sufficient to satisfy the judgment.
b) que le tiers se présente, aux date, heure et lieu précisés, pour faire valoir les raisons pour lesquelles il ne devrait pas payer au créancier judiciaire la dette dont il est redevable au débiteur judiciaire ou la partie de celle-ci requise pour l’exécution du jugement.
Marginal note: Service of show cause order
Note marginale: Signification
(2) An order to show cause made under subsection (1) shall be served, at least seven days before the time appointed for showing cause,
(2) L’ordonnance rendue en vertu du paragraphe (1) est signifiée, au moins sept jours avant la date fixée pour la comparution du tiers saisi :
(a) on the garnishee personally; and
a) au tiers saisi, par signification à personne;
(b) unless the Court directs otherwise, on the judgment debtor.
b) au débiteur judiciaire, sauf directives contraires de la Cour.
Marginal note: Debts bound as of time of service
Note marginale: Prise d’effet de l’ordonnance
(3) Subject to rule 452, an order under subsection (1) binds the debts attached as of the time of service of the order.
[emphasis added]
(3) Sous réserve de la règle 452, l’ordonnance rendue en vertu du paragraphe (1) grève les créances saisies-arrêtées à compter du moment de sa signification.
[soulignement ajouté]
[41] In other words, the Rules require some basis on which to ground a finding that a debt was owing or accruing by Nevsun as garnishee to the judgment debtor Eritrea and or ENAMCo: Champlain Company Limited v The Queen, [1976] 2 FC 481 (FCA).
[42] In this case, there is no evidence of a debt owing or accruing by Nevsun to Eritrea, nor is there any evidence of any debt owing or accruing by Nevsun to ENAMCo. While BMSCo has paid and is continuing to pay money, indeed quite substantial amounts of money, to both ENAMCo and Eritrea in the form of dividends, royalties, licence fees and taxes, Delizia is not entitled to garnish such payments from Nevsun, unless this Court pierces the corporate veil that presumptively exists between Nevsun and BMSCo as separate legal entities. Certain payments may also be exempt from garnishment under the SIA, which I will consider later.
[43] However, and with respect, the corporate veil may not be pierced in this case for the following reasons.
(2) There is no improper conduct or conduct akin to fraud as required to pierce the corporate veil [44] There is no doubt that lifting the corporate veil is contrary to well-established principles of corporate law, both in Canada and elsewhere. In order to pierce a corporate veil in the absence of agency or statutory requirement, there must be a sham or the existence of a vehicle for wrongdoing, or some conduct akin to fraud. This test was affirmed by the Federal Court of Appeal (per Malone, Décary and Rothstein JJ.A) in Meredith v R, 2002 FCA 258 [Meredith] where that Court stated:
[12] Lifting the corporate veil is contrary to long-established principles of corporate law. Absent an allegation that the corporation constitutes a “sham” or a vehicle for wrongdoing on the part of putative shareholders, or statutory authorisation to do so, a court must respect the legal relationships created by a taxpayer (see Salomon v. Salomon & Co., [1897] A.C. 22; Kosmopoulos v. Constitution Insurance Co. of Canada, [1987] 1 S.C.R. 2). A court cannot re-characterize the bona fide relationships on the basis of what it deems to be the economic realities underlying those relationships (see Continental Bank Leasing Corp. v. The Queen, [1998] 2 S.C.R. 298; Shell Canada Ltd. v. The Queen, [1999] 3 S.C.R. 622 at para. 51).
[emphasis added]
[45] I am bound by this decision of the Federal Court of Appeal. I wish to add that many other cases in many other jurisdictions apply the same approach and require wrongdoing or conduct akin to fraud before piercing the corporate veil. Recently, for example, the Ontario Court of Appeal stated in Shoppers Drug Mart v 6470360 Canada Inc, 2014 ONCA 85 at para 43 [Shoppers Drug Mart]:
43 […] Fleischer is the appropriate test to apply to piercing the corporate veil in Ontario. In Fleischer, Laskin J.A. stated that only exceptional cases that result in flagrant injustice warrant going behind the corporate veil. It can be pierced if those in control expressly direct a wrongful act to be done. At para. 68, he stated:
Typically, the corporate veil is pierced when the company is incorporated for an illegal, fraudulent or improper purpose. But it can also be pierced if when incorporated “those in control expressly direct a wrongful thing to be done”: Clarkson Co. v. Zhelka at p. 578. Sharpe J. set out a useful statement of the guiding principle in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423 at pp. 433-34 (Gen. Div.), affd [1997] O.J. No. 3754 (C.A.): “the courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.”
[emphasis added]
[46] Another recent decision to the same effect sets out three circumstances in which a company’s separate legal personality may be disregarded and the corporate veil pierced:
[44] Since Salomon v. Salomon & Co., supra, Anglo-Canadian law has recognized that a corporation is a legal entity distinct from its shareholders. A parent corporation is also a legal entity distinct from a wholly-owned subsidiary. In Gregorio v. Intrans-Corp. (1994), 18 O.R. (3d) 527 (C.A.) at para. 24, the Court of Appeal stated with respect to the separate legal personality of a parent and subsidiary:
Generally, a subsidiary, even a wholly owned subsidiary, will not be found to be the alter ego of its parent unless the subsidiary is under the complete control of the parent and is nothing more than a conduit used by the parent to avoid liability. The alter ego principle is applied to prevent conduct akin to fraud that would otherwise unjustly deprive claimants of their rights.
[45] Ontario courts have recognized three circumstances in which separate legal personality can be disregarded and the corporate veil can be pierced: (a) where the corporation is “completely dominated and controlled and being used as a shield for fraudulent or improper conduct” (642947 Ontario Ltd. v. Fleischer (2001), 56 O.R. (3d) 417 (C.A.) at para. 68); (b) where the corporation has acted as the authorized agent of its controllers, corporate or human (Parkland Plumbing & Heating Ltd. v. Minaki Lodge Resort 2002 Inc., 2009 ONCA 256, [2009] O.J. No. 1195 at para. 51); and (c) where a statute or contract requires it (Parkland Plumbing, supra, at para. 51).
[emphasis added]
Angelica Choc v Hudbay Minerals Inc, 2013 ONSC 1414 [Angelica Choc].
[47] In terms of wrongdoing or conduct akin to fraud, I appreciate it may appear that the Supreme Court of Canada advanced a wider test for piercing the corporate veil. This test would not require a finding of wrongdoing or fraud: all that might be needed is a finding that not piercing the veil would be “too flagrantly opposed to justice, convenience or the interests of the Revenue”: Kosmopoulos v Constitution Insurance Co, [1987] 1 SCR 2 [Kosmopoulos], per Justice Wilson:
12. As a general rule a corporation is a legal entity distinct from its shareholders: Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.) The law on when a court may disregard this principle by “lifting the corporate veil” and regarding the company as a mere “agent” or “puppet” of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the “separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice, convenience or the interests of the Revenue”: L. C. B. Gower, Modern Company Law (4th ed. 1979), at p. 112. I have no doubt that theoretically the veil could be lifted in this case to do justice, as was done in American Indemnity Co. v. Southern Missionary College, supra, cited by the Court of Appeal of Ontario. But a number of factors lead me to think it would be unwise to do so.
13. There is a persuasive argument that “those who have chosen the benefits of incorporation must bear the corresponding burdens, so that if the veil is to be lifted at all that should only be done in the interests of third parties who would otherwise suffer as a result of that choice”: Gower, supra, at p. 138. Mr. Kosmopoulos was advised by a competent solicitor to incorporate his business in order to protect his personal assets and there is nothing in the evidence to indicate that his decision to secure the benefits of incorporation was not a genuine one. Having chosen to receive the benefits of incorporation, he should not be allowed to escape its burdens. He should not be permitted to “blow hot and cold” at the same time.
14. I am mindful too of this Court's decision in the Aqua‑Land Exploration Ltd. case, supra, in which the Court did not “lift the veil” in order to find that one of three shareholders in a corporation had an insurable interest in its asset. So also in the Wandlyn Motels Ltd. case, supra, the Court refused to regard a motel owned by a man who held all but two of the shares of the insured, Wandlyn Motels Ltd., as the property of that corporation. If the corporate veil were to be lifted in this case, then a very arbitrary and, in my view, indefensible distinction might emerge between companies with more than one shareholder and companies with only one shareholder: for a recent comment on the arbitrary and technical distinctions that would be created by lifting the corporate veil in this case, see Jacob S. Ziegel, “Shareholder’s Insurable Interest-Another Attempt to Scuttle the Macaura v. Northern Assurance Co. Doctrine: Kosmopoulos v. Constitution Insurance Co.” (1984), 62 Can. Bar Rev. 95, at pp. 102‑03. In addition, it is my view that if the application of a rule leads to harsh justice, the proper course to follow is to examine the rule itself rather than affirm it and attempt to ameliorate its ill effects on a case-by-case basis.
[emphasis added]
[48] I note the Prothonotary relied on the first part of paragraph 12 of Kosmopoulos to pierce the corporate veil so as to fix Nevsun with BMSCo’s obligations to ENAMCo and Eritrea, and to base his finding that: “BMSCo is only the mere agent or puppet of Nevsun and that to conclude to the contrary would yield a result for Delizia, which seeks to enforce the Judgment, that is too flagrantly opposed to justice” [emphasis added].
[49] However, Canadian courts, including the Federal Court of Appeal in Meredith have repeatedly held that mere injustice to one party is not sufficient, without more, to pierce the corporate veil. For example, see Shoppers Drug Mart at para 43, “only exceptional cases that result in flagrant injustice warrant going behind the corporate veil. It can be pierced if those in control expressly direct a wrongful act to be done”; Emtwo Properties Inc v Cineplex (Western Canada) Inc, 2011 BCSC 1072 [Emtwo] at paras 127-128, 132; Actton Petroleum Sales Ltd v British Columbia (Minister of Highways) (1998), 50 BCLR (3d) 187 at paras 15, 19; and BG Preeco (Pacific Coast) Ltd v Bon Street Holdings Ltd (1989), 37 BCLR (2d) 258 (CA) at paras 37-40.
[50] UK cases also indicate that evidence of wrongdoing or conduct akin to fraud is required to pierce the corporate veil. See Prest v Petrodel Resources and others, [2013] UKSC 34; Adams v Cape Industries plc [1990] Ch 433 (Slade, Mustill and Ralph Gibson L JJ). Also in support of a conduct akin to fraud requirement is the following passage from Gower, Modern Company Law, 4th ed. (1979) at page 138 which in my view, convincingly rejects the free-wheeling “just and equitable” approach as smacking of “palm-tree justice” rather than the application of legal rules:
The most that can be said is that the courts’ policy is to lift the veil if they think that justice demands it and they are not constrained by contrary binding authority. The results in individual cases may be commendable, but it smacks of palm-tree justice rather than the application of legal rules.
[51] In any event, I am not persuaded Nevsun’s actions by any means constituted “conduct too flagrantly opposed to justice”. It is important to note that Nevsun set up BMSCo in Eritrea in 2006 – well before and completely unconnected with the dispute at hand. Moreover, in my view, ENAMCo was given and obtained a 40% interest in BMSCo to accommodate legal requirements imposed by the State of Eritrea concerning local ownership and control of mining interests within its territory. The Prothonotary also found BMSCo was not put in place to avoid garnishment.
[52] These longstanding arrangements constituted legitimate business purposes. There is no evidence in this case of fraud, conduct akin to fraud or improper conduct on the part of Nevsun or its subsidiaries. Whatever payments were made by BMSCo to ENAMCo or Eritrea were made under longstanding arrangements that well predate these proceedings altogether. Nor is this the case of a company incorporated as an afterthought to cover sham transactions. BMSCo was separately incorporated to allow for the ownership of assets in Eritrea to be held jointly between ENAMCo and Nevsun and to meet the requirements of Eritrean law.
[53] These legitimate business purposes both introduce and support my finding that BMSCo’s incorporation was valid as a separate legal entity from Nevsun. The Prothonotary’s finding that the corporate structure was “[certainly]… not put in place to avoid this garnishment” was correct. However, it is inconsistent with his subsequent suggestion that by keeping the structure in place, Nevsun sought to protect itself in the event of such a proceeding. Potential garnishees are under no obligation to re-arrange long-standing and legitimate corporate arrangements to accommodate potential garnishors, and they should not be faulted for not doing so.
(a) No agency or complete control or puppet relationships [54] Another ground on which the corporate veil may be pierced, as noted in Angelica Choc is the presence of agency, i.e., a situation where the subsidiary is completely controlled by the parent and acts as a mere puppet or agent. There is no evidence of agency in this case. Nevsun only indirectly holds a 60% interest in BMSCo through a series of wholly-owned subsidiaries, while ENAMCo holds 40%. In my view, Nevsun’s partial indirect ownership in this case is insufficient to ground a finding of agency. The evidence does not support complete control of ENAMCo by Nevsun, nor does it support a finding that BMSCo acted as a mere puppet or agent of Nevsun: to say that would be to ignore the influence on BMSCo exercised by ENAMCo.
[55] In any event, the case law is clear that control alone cannot, without more, constitute either express or implied agency sufficient to lift the corporate veil. If it were otherwise, the corporate veil would be lifted for all subsidiaries, which is not the law: Meredith; Trans-Pacific Shipping Co v Atlantic & Orient Trust Co Ltd, 2005 FC 311 (motion to strike out denied); Emtwo at paras 127-128); Kosmopoulos. While the Prothonotary appears to have found agency in order to lift the corporate veil, I am unable to agree.
[56] For the same reasons, even being a “puppet” in the sense of being completely controlled, as is the case with virtually all wholly-owned subsidiaries, is in my respectful view insufficient to justify lifting the corporate veil in the absence of improper conduct or conduct akin to fraud: see generally Salomon v Salomon & Co, Ltd, [1897] AC 22 (HL); Edgington v Mulek Estate, 2008 BCCA 505, and the Federal Court of Appeal’s decision in Meredith.
(b) No statutory requirement to pierce the corporate veil [57] Angelica Choc identifies a third category of relationships in which a corporate veil may be lifted, namely where statutes require that to be done. Examples include anti-avoidance provisions of taxation or family law regimes where the legislatures have chosen to remove the common law protection to promote public policy goals. This exception does not apply in this case.
[58] With respect, my finding that the corporate veil may not be pierced disposes of this appeal and requires that the Nevsun FOG be set aside.
(3) Failure to appeal, res judicata and rule against collateral attacks [59] In the alternative, Delizia argues that Nevsun is precluded from attacking the Nevsun FOG because of res judicata, Nevsun’s failure to appeal or otherwise attack the FOG, and the rule against collateral attacks. In my view, none of these arguments have merit.
[60] Generally, I am unable to accept that a finding made on an ex parte application for a Recognition Order or an ex parte application for a provisional order of garnishment bind the Court hearing a final order of garnishment. In my view, such findings in this case are rebuttable. The provisional order of garnishment expressly required the garnishee Nevsun to “show cause why it should not pay” the debts sought to be garnished. Nevsun, when it got the chance to address this Court, did just that. In my view, Nevsun was at liberty to challenge findings made without notice to it in both the Recognition Order and the Nevsun POG. To hold otherwise would defeat the purpose of the mandatory “show cause” component of Rule 449(1)(b) which requires the proposed garnishee be given an opportunity to “show cause why the person should not pay” the debts alleged to the judgment creditor.
(a) Failure to appeal [61] In my respectful view, the suggestion Nevsun should have appealed or challenged the POG (or the Recognition Order) is unconvincing for several reasons. I see no reason why Nevsun should have employed Rule 399 in addition to filing its responding “show cause” material under Rule 449. Rule 453 specifically calls for summary determinations of garnishment proceedings. I see nothing summary about requiring a garnishee to bring separate and additional proceedings in addition to showing cause why a provisional order of garnishment should not be made final. This is especially the case where both the Recognition Order and the POG were made ex parte. A multiplicity of proceedings is to be avoided and certainly should not be encouraged. There is considerable efficiency in having issues such as this determined at the show cause hearing; indeed the very purpose of the show cause hearing is to summarily determine whether the Nevsun POG should be converted to a final order of garnishment.
(b) Res judicata [62] I do not agree that Nevsun is bound by the Recognition Order and or the Nevsun POG on the grounds they are res judicata and were not appealed. In my respectful view, the res judicata argument must fail because res judicata at a minimum requires an identity of parties which is not the case with the Recognition Order: Nevsun was not a party to the Recognition Order and therefore res judicata does not apply. Allowing Nevsun to address the validity of the Recognition Order as part of the show cause hearing accords with the underlying purpose of the doctrine of res judicata, namely to ensure the efficiency of the justice system.
[63] In bringing its “causes” to the attention of the Court for adjudication on the Court-ordered “show cause” hearing, Nevsun is doing as allowed and contemplated by Rule 449(1)(b): Nevsun was entitled to and in this respect was showing cause why the POG should not be made final.
(c) Collateral attack [64] I do not agree that Nevsun is making a form of impermissible collateral attack on the Recognition Order by raising these defences as causes why the POG should not be made final. I recognize the rule against collateral attacks. However in my view, raising these issues is expressly allowed by the “show cause” provision in the Rules which not only authorized but compelled Nevsun to “show cause” why a final order of garnishment should not be made: Rule 449(1)(b). Therefore in my view, the collateral attack rule does not apply. What transpired was not a collateral attack but simply the showing of cause why the POG