IN THE SUPREME COURT OF BRITISH COLUMBIA
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Citation: |
Reeves v. Hart et al, |
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2003 BCSC 826 |
Date: 20030527
Docket: L031073
Registry: Vancouver
Between:
Melvin R. Reeves
Petitioner
And
Kim Noble Hart, Sungold Entertainment Corp., Horsepower Broadcasting Network Inc., Her Majesty the Queen in Right of the Province of British Columbia and the Registrar of Companies of British Columbia
Respondents
Before: The Honourable Madam Justice Humphries
(In Chambers)
Reasons for Judgment
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Counsel for the Petitioner |
Robert A. Millar K. Hendricksen
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Counsel for the Respondent Kim Noble Hart
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Rupert Shore |
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Counsel for the Respondents Sungold and Horsepower
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Edward E. Bowes |
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Date and Place of Hearing: |
April 28, 2003 |
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Vancouver, B.C. |
[1] The Petitioner, Melvin Reeves ("Reeves"), applies under s. 114 of the Company Act, R.S.B.C. 1996, c. 62, to have the Respondent Kim Noble Hart ("Hart") declared disqualified to act as a director and officer of the Respondent companies Sungold Entertainment Corp. ("Sungold") and Horsepower Broadcasting Network Inc. ("Horsepower"). Counsel for the companies made submissions in support of Hart.
[2] Section 114 of the Company Act reads:
(1) No person is qualified to become or to act as a director of a company who is
….
(e) unless the court orders otherwise, convicted in or out of British Columbia of an offence
….
(ii) involving fraud
unless 5 years have elapsed since the [imposition of sentence or the term of imprisonment is concluded, whichever is later].
[3] Both Sungold and Horsepower are incorporated pursuant to the laws of British Columbia and are regulated by the Company Act. Horsepower is a wholly owned subsidiary of Sungold, a public company which trades through an American entity called “Bulletin Board”. The business of both companies is to sell software for virtual horseracing games.
[4] The Petitioner Reeves and the Respondent Hart are directors of Sungold. The bulk of the affidavit material before me describes Hart as the driving force in Sungold and, in fact, he was instrumental in hiring Reeves. Reeves is a consultant to a numbered company which provides management services to Sungold's wholly owned subsidiary in Quebec, "Horsepower Quebec". Reeves became a director of Sungold in February of 2003.
[5] Reeves says he became aware on March 25, 2003 that Hart had pleaded guilty to an offence under s. 239(1)(d) of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp). After trying various non-litigious methods of removing Hart as director, Reeves brought this petition.
[6] Hart says the Board of Directors and Reeves knew about the conviction all along, and Reeves has been motivated to bring this petition because his lucrative consulting contract has been cancelled by a vote of the directors of the company, from which Hart abstained.
[7] In any event, there is no doubt that on 28 November 2002, Hart pleaded guilty to one count of tax evasion contrary to s. 239(1)(d) of the Income Tax Act. Section 239(1) reads:
Every person who has
….
(d) wilfully, in any manner, evaded or attempted to evade compliance with this Act or payment of taxes imposed by this Act...
is guilty of an offence.
[8] When the plea of guilty was entered, a joint statement of facts was filed for the purposes of sentencing. In 1996 and 1997, Hart's tax return was prepared by an accountant who relied on information provided by Hart and his bookkeeper. This information included share summaries of the purchase and sale of Hart's Sungold shares for those years. The adjusted cost base of the Sungold shares sold by Hart was overstated, correspondingly reducing the amount of profit indicated as having been earned. This meant that Hart understated his taxable income by $105,710 in 1996, and by $105,870 in 1997, resulting in the evasion of $28,528 and $29,761 in federal income taxes for those years respectively.
[9] Hart also claimed some business expenses for which he had already been reimbursed.
[10] The relevant paragraphs setting out the particulars of the offence to which Hart pleaded guilty are:
13. In November 1998, the Canada Customs and Revenue Agency audited Hart for 1996 and 1997. Hart provided the auditor with the same share summaries that had been provided to the accountant. The auditor then requested documentation from Hart to verify the figure shown as the adjusted cost base of the shares in the summaries. In response, Hart provided the auditor with copies of cancelled cheques and two receipts that had been falsified as follows:
a. Some of the cheques that Hart provided to the auditor purportedly in support of his purchase of the Sungold shares had been altered after they had cleared the bank, so that the amounts written on them were higher than what had actually been negotiated.
b. One of the cheques that had originally been made out to "CASH" was altered after it had been negotiated at the bank to be payable to "WALLY CASHMAN".
c. Another one of the cheques purportedly for the purchase of Sungold shares had never been negotiated.
d. The two receipts provided to the auditor were also fraudulent. The people who purportedly issued the receipts did not actually make them. A search warrant executed on Hart's residence uncovered a receipt book with practice signatures matching the signature on one of the fraudulent receipts.
[11] Hart, supported by the companies, says there is no indication in the facts to which he pleaded as to who actually did the fraudulent transactions, and indeed, without an examination into the mind of the person who did the transactions, fraud cannot be established. Hart used a personal friend as an accountant at the relevant time, and this friend has passed away since the returns were filed. If this friend, or some other person altered the cheques and wrote the receipts, Hart says we cannot know their purpose in doing so. This offence is therefore merely one of wilfully evading taxes and does not involve fraud.
[12] It
is Reeves’ position that this conviction clearly involves fraud. If
the offence of "tax evasion" itself does not include fraud
as an essential element, then the facts underlying this particular conviction
clearly demonstrate fraudulent conduct. The fraudulent conduct for which
Hart was convicted was in providing falsified documents and fraudulent
receipts to Revenue
[13] I agree with the Petitioner. The documents were agreed to be falsified and fraudulent. They were used by Hart to change the adjusted cost base of the shares and reduce the tax payable. An element of the offence of tax evasion is that it is done wilfully. Whether he actually prepared the documents himself is irrelevant. The offence to which he pleaded guilty involved fraud.
"UNLESS THE COURT ORDERS OTHERWISE"
[14] I must therefore decide whether it is open to me to consider the Respondents' alternate position that I exercise my discretion to allow Hart to continue as a director. Reeves says that such an application must be brought by separate petition.
[15] I conclude that it is open to me to consider the application. Section 114 contains the words "unless the court otherwise orders" within the relevant phrase. It would not make sense to disqualify Hart and disregard those words, thus requiring another petition to be brought.
[16] Reeves' general proposition is that the sanctity of the limited company, especially one trading publicly, must be preserved and that Hart is not to be entrusted with it. For the protection of the public and for the sake of the companies, he must be removed. The offence involved sale of shares in Sungold, the company of which he is a director; it was a serious offence and not merely a regulatory breach; and the gaming business in which Sungold and Horsepower are involved is highly regulated and requires a high degree of honesty and trustworthiness.
[17] Hart and the companies say Hart is the driving force behind the companies and their viability depends on his maintaining his position as director. They submit that the Petitioner has in fact taken advantage of Hart's innovative ideas in promoting the company by buying significant stock in Sungold. They contend that Reeves has ulterior motives for bringing this petition and has acted with inappropriate aggressiveness in bringing the matter before the court.
[18] Counsel for the company argues that since Sungold is a public company, no one director can sign cheques and the company must file reports to satisfy securities regulations in both Canada and the U.S.; therefore, there is adequate protection available for the public. Neither the Registrar of Companies nor the Securities Commission have taken any position on this conviction, which received publicity and was hidden from no one. Counsel submits that these bodies, not Mr. Reeves with his private agenda, are the watchdogs for the public, and if they have not indicated a concern, then my discretion should be exercised in favour of allowing Hart to continue as director.
[19] These are not sufficient reasons to exercise my discretion in Hart's favour. In view of the circumstances of the offence to which Mr. Hart pleaded guilty and his role as director in a publicly traded company, there should be a compelling reason to allow him to continue to act as a director of a company once he has been convicted of an offence involving fraud, particularly where the offence concerns shares in that very company. It is not sufficient simply to point to a present lack of action by the Securities Commission and the Registrar of Companies. What their respective functions would be in these circumstances is not clear, nor is whether they would use resources to investigate a director whose company is not listed on a Canadian exchange. As for the viability of the company being dependent on Mr. Hart, his involvement in the company need not end – only his tenure as director. It is apparent from the position of counsel for the companies that the rest of the Directors support Mr. Hart. I am not satisfied that the viability of Sungold would be diminished to a significant degree if Hart were removed as director.
[20] In the result, Mr. Hart is prohibited from acting as director of Sungold pursuant to s. 114 of the Company Act.
[21] Mr. Reeves seeks full indemnity for costs from the company pursuant to s. 128 of the Company Act and Part 20.1 of the Articles of Sungold.
[22] S. 128 reads:
(1) A company, with the approval of the court, may indemnify a person who is a director...of the company...against all costs...actually and reasonably incurred by the person...in a civil...proceeding to which the person is made a party because of being or having been a director, including an action brought by the company or corporation, if
(a) the person acted honestly and in good faith with a view to the best interests of the corporation of which the person is or was a director.
[23] Part 20.1 reads:
20.1. Subject to the provisions of the Company Act, the directors shall cause the company to indemnify a director...of the company...against all costs...actually and reasonably incurred by him...in a civil...action or proceeding to which he is...made a party by reason of his having been a director of the company, including any action brought by the company or any such corporation. Each director of the company on being elected or appointed shall be deemed to have contracted with the companion the terms of the foregoing indemnity.
[24] Reeves says an order indemnifying him for the costs of bringing this petition would serve to protect the public interest by encouraging other directors to come forward in similar situations.
[25] No authority was cited to me in respect of such an award of costs in a situation where one director has initiated a petition and sought an order against another director whom the rest of the directors support. Counsel for Reeves referred to Consolidated Enfield Corp. v Blair, (1995),128 D.L.R. (4th) 73 (S.C.C.), where an application was brought against a director. Although unsuccessful, the director obtained indemnity for his costs because he had been made a party to the litigation by reason of being a director, the costs were reasonably incurred, and he had acted honestly and in good faith with a view to promoting the best interests of the appellant.
[26] Reeves initiated this petition; he was not made a party to litigation by reason of his position as director. Although he has been successful, I am not prepared to require the company to fully indemnify him for his costs in the circumstances of this case.
[27] Reeves will have his costs at Scale 3.
“M.A. Humphries,
J.”
The Honourable Madam Justice M.A. Humphries