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Securities Litigation Group e-LERT - Cassels Brock Successfully Obtains Rare Contempt Order, Million Dollar Restitution Award and Possible Jail Sentence for Breach of Undertaking to the Court

Published: 04/01/2011

By Robert B. Cohen, Lorne Silver, Jessica Zagar

On December 13, 2010, Cassels Brock and Blackwell appeared on behalf of the plaintiffs, Wheels Holdco Inc., Synaps Group Inc. and Wheels International Freight Systems Inc., and successfully argued that a director of a defendant corporation be held in contempt of Court and required to make restitution to the plaintiffs in the amount of $942,916.70, plus interest, failing which leave be granted to issue a bench warrant for his arrest.

By way of background, on April 30, 2010, the plaintiffs brought a motion for injunctive relief and a mandatory order compelling the defendants to endorse, in favour of the plaintiffs, a tax refund cheque from Canada Revenue Agency in the amount of $942,916.70, which the plaintiffs were entitled to receive in accordance with the terms of various agreements between the parties.  In response to the plaintiffs’ motion, a director of one of the defendant corporations swore an affidavit, in which a personal undertaking was given to deliver the tax refund cheque to the plaintiffs' counsel immediately upon receipt.  On the strength of the director’s undertaking, Madam Justice Himel dismissed the plaintiffs' motion because "the defendants have clearly undertaken to forward any cheque received from Revenue Canada to Cassels Brock in trust for the plaintiffs".

By May 12, 2010, the plaintiffs discovered that the tax refund cheque had been cashed by a defendant corporation on the very same day that the director provided the undertaking and Madam Justice Himel dismissed the plaintiff’s motion for a mandatory order.  The parties appeared before Mr. Justice Belobaba on May 21, 2010, who granted considerable relief in favour of the plaintiffs and ordered that a show cause contempt hearing proceed in respect of the director's breach of the undertaking.

At the show cause hearing, heard by Madam Justice Roberts on December 13, 2010, the plaintiffs proved and the Court found that the director had provided the undertaking voluntarily, that the lower Court had relied on the undertaking in dismissing the motion for urgent relief, that the director had knowledge of Madam Justice Himel's Order and the Court’s reliance on the undertaking and, that the plaintiffs remained entitled to the full amount of the tax refund.  On cross-examination, the director further admitted that the undertaking was breached as he understood that his obligation was to find the cheque and deliver it to counsel for the plaintiffs. 

The Court also rejected the director's argument that he did not possess the requisite intent to be found in contempt of Court for breach of the undertaking.  The director argued that he had done his best to comply with the undertaking and that any failure in that regard was inadvertent.  In describing the director's efforts to comply with the undertaking as "grossly inadequate", Madam Justice Roberts agreed with the plaintiffs’ submissions that the evidence demonstrated beyond a reasonable doubt that the director wilfully and deliberately breached the undertaking and the resulting Order.  In this regard, Madam Justice Roberts accepted the plaintiffs' position that the requisite “deliberate” conduct included any conduct which was fully considered, not impulsive or accidental, including conduct that exhibited recklessness or wilful blindness.  The Court found that, given the director's knowledge, education and experience and his understanding of the urgency and importance of the tax refund cheque, he should have undertaken a more vigorous inquiry into the cheque's whereabouts.  Madam Justice Roberts accepted the plaintiffs' submission that the only reasonable inference to be drawn from the evidence was that the director knew that the tax refund cheque had already arrived and deliberately concealed it, or, knowing that it would imminently arrive, the director did not truly want to discover the whereabouts of the cheque, as he had given the undertaking to do. 

In determining the appropriate sanction for the director’s contempt, Madam Justice Roberts accepted the plaintiffs' position that the appropriate result was to require the director to comply with his undertaking and make full restitution to the plaintiffs for both the full amount of the tax refund cheque and the plaintiffs' substantial indemnity costs of its motion, failing which the director should be incarcerated.  The plaintiffs also successfully argued that the order be deemed to be a restitution order pursuant to section 178(1)(a) of the Bankruptcy and Insolvency Act so as to be exempt from an order of discharge of bankruptcy.

The case is significant for a number of reasons as it confirms:

• an undertaking entered into with or given to the Court has the same force and effect as an order made by the Court, such that a proven breach of an undertaking amounts to contempt of Court; 
   
• compliance with Court orders is fundamental to the administration of justice, and the Courts will address proven breaches of Court orders with very serious sanctions;
   
• while the acts of contempt must be intentional or deliberate, conduct involving recklessness or wilful blindness may suffice; 
   
• a person found in contempt of Court may be required to make restitution with such restitution order being exempt from an order of discharge of bankruptcy; and 
   
• costs of a successful motion for contempt should, in the ordinary course, be forthwith payable to the moving party, on a substantial indemnity scale.

Wheels Holdco Inc., Synaps Group Inc. and Wheels International Freight Systems Inc. were represented by Lorne Silver, Robert Cohen and Jessica Zagar of Cassels Brock & Blackwell LLP.