Hung v Ontario Securities Commission, 2018 ONSC 6729 (Div Ct)
The Divisional Court has released yet another chapter in the saga of one of the largest frauds in Canadian history. In 2017, after a 188-day merits hearing, the Ontario Securities Commission (the Commission) released its decision concerning allegations of fraud against Sino-Forest Corporation (Sino-Forest) and its senior officers. In that decision, the Appellants, as senior officers of Sino-Forest, were found to have authorized, permitted, or acquiesced in the company making misleading statements in its disclosure documents and to have misled Staff of the Commission during their investigation. The hearing panel also found that the Appellant, Mr. Chan, committed fraud in the sale of his undisclosed interest in Greenheart Resources Holdings Limited to Sino-Forest. Almost a year later, the Commission released its sanctions and costs decision.
The Appellants, Messrs. Hung, Ip, Ho, and Chan, appealed both the decision on the merits and the decision on sanctions and costs. The Commission subsequently sought an order for security for costs. The Divisional Court released its decision on the motion for security for costs on November 26, 2018.
The Legal Framework
Rule 61.06(1) of the Rules of Civil Procedure, RRO 1990, Reg 194, states when security for costs may be ordered. The Commission relied on rules 61.06(1)(a), (b), and (c):
61.06(1) In an appeal where it appears that,
(a) there is good reason to believe that the appeal is frivolous and vexatious and that the appellant has insufficient assets in Ontario to pay for the costs of the appeal;
(b) an order for security for costs could be made against the appellant under rule 56.01; or
(c) for other good reason, security for costs should be ordered,
a judge of the appellate court, on motion by the respondent, may make such order for security for costs of the proceeding and of the appeal as is just.
With respect to rule 61.06(1)(b), Horkins, J. noted that the Court of Appeal has determined that a respondent on an appeal may not rely on rule 61.06(1)(b) to obtain an order for security for costs of an appeal as against an appellant. The policy rationale is not to impose security for costs upon foreign or impecunious defendants who are forced by others to defend themselves in a legal proceeding. Because the appellants were compelled to attend the hearing before the Commission to defend themselves, the Commission was only entitled to rely on rules 61.06(a) and (c).
The appeal did not appear to be vexatious
Under rule 61.06(1)(a), the Commission must show that it “appears” there is good reason to believe that the Appellants’ appeal is frivolous and vexatious, and that they lack sufficient assets in Ontario to pay the costs of the appeal. The lack of sufficient assets was not disputed.
Horkins, J. found that there was good reason to believe that the grounds of appeal were frivolous: The hearing lasted 188 days and the panel issued detailed reasons in support of its findings of wrongdoing. However, the Commission did not show that there was good reason to believe the appeal was vexatious given that the usual indicia of vexatiousness were not present. The Appellants had expeditiously proceeded with their appeal, and there was no history of non-compliance with court and Commission orders.
There was some other good reason to order security for costs
Horkins, J. relied on the Ontario Court of Appeal’s decision in Mechanical Services Inc. v Flesch, 2010 ONCA 633 to determine what constitutes “other good reason” under rule 61.01(1)(c):
The court does not have a closed list of cases in which security for costs has been ordered under the residual category. […] However, the “other good reason” must be related to the purpose for ordering security: that a respondent is entitled to a measure of protection for costs incurred and to be incurred in the proceeding, which is now on appeal. And, the “other good reason” should be a fairly compelling reason…
The Commission submitted that the “other good reason” to order security for costs was the fact that the merits panel made “powerful findings of fraud” against the Appellants.
Horkins, J. agreed that strong findings of fraud constitute “other good reason” to order security, particularly where an appellant has taken steps to put assets out of the reach of creditors. There was evidence that the appellants received substantial monies as a result of the breach of Ontario securities law. These monies were obtained by the Appellants outside Ontario and were beyond the reach of the Commission. There was also evidence that Messrs. Ho and Ip transferred real property to their respective wives after the Commission’s Statement of Allegations was filed against them.
It was just to order security for costs
Once the Commission proved that rule 61.06(1)(c) was satisfied, part two of the test triggered an inquiry into the justness of the order sought.
Horkins, J. held that it was just to order security for costs. The Commission was not using the motion for security for costs as a litigation tactic to prevent the appeal from being heard. The parties were working together to ensure that the appeal proceeded without delay. Further, the Commission had good reason to be concerned about the costs of the appeal and being able to collect on a costs order that may be made if the appeal was dismissed. The Appellants had, after all, orchestrated an elaborate premeditated and coordinated fraud to overstate the assets and revenue of Sino-Forest – one of the largest frauds in Canadian history, resulting in a loss of approximately US$6 billion in market capitalization.
Accordingly, Horkins, J. ordered that the Appellants post security for the costs of the hearing before the Commission and the appeal in the amount of $100,000.00.
The author would like to thank Elana Friedman, articling student, for her contribution to this article.