Supreme Court of Canada
R. v. Olan et al.,  2 S.C.R. 1175
Her Majesty The Queen (Plaintiff) Appellant;
Samuel L. Olan, William H. Hudson and Thomas R. Hartnett III (Defendants) Respondents.
1978: January 30, 31; 1978: May 30.
Present: Laskin C.J. and Martland, Ritchie, Spence, Pigeon, Dickson, Beetz, Estey and Pratte JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.
Criminal law—Fraud—Elements of fraud—Directors’ actions re assets of company—Absence of quid pro quo—Basis of evidence of fraud to go to jury—Criminal Code, R.S.C. 1970, c. C‑34, s. 338(1).
In late 1971 Langley’s Limited, a long-established dry-cleaning enterprise in Toronto, owned a substantial portfolio of “blue-chip” securities valued at $1,443,460. The control of the company, some 90 per cent of the common shares, was held by two estates and an individual represented by a chartered accountant, Leonard Johnston. Mr. Johnston was approached by one of the accused, Olan, President of First Montreal City Corporation Limited, to discuss the purchase of the controlling shares. It was agreed that the controlling common shares and certain preferred shares of Langley’s would be acquired by First Montreal for approximately $1,485,000 payable in cash. Toward the end of the negotiations Mr. Johnston also met the other accused Hudson, President and Director of Beauport Holdings, and Hartnett, Vice‑President and Director of Beauport Holdings and legal adviser to Hudson. Before closing First Montreal assigned its rights under the agreement to Beauport. Thereafter Hudson and Hartnett played the dominant roles aided by Olan who was to receive a finder’s fee of approximately $67,000 for negotiating the sale. As at November 30, 1971 the total current assets of Beauport Holdings were $149,968.30 and the total assets $738,966.87. The closing date for the purchase of the Langley’s shares was to have been December 2, 1971, but, as the purchasers did not have the necessary money, was postponed. A series of financial manœuvres followed. A bank account had been opened in name of Beauport Holdings on December 8, 1971, and the accused met with the bank manager concerning the certification of a cheque for $1,025,000 to be drawn on the account. There were no funds in the account but the manager was advised that a deposit of $488,000 was available and would be deposited later the same day. At a second meeting the manager agreed to
the certification but only on conditions—he was to be present at the closing and retain possession of the cheque until the purchase of Langley’s was completed, when the accused would take possession of Langley’s portfolio, sell the securities and with the proceeds cause Langley’s to buy another company owned by them. On December 10, 1971, the accused completed through Beauport Holdings the purchase of approximately 90 per cent of Langley’s common shares; the preferred shares were purchased later. The vendors received the certified cheque for $1,025,000 drawn on the account of Beauport Holdings plus $246,545 being the proceeds of a loan to Beauport Holdings.
Another company, Beauport Financial Corporation Limited, had been incorporated by Hudson and Hartnett on November 23, 1971. Immediately after the purchase of the Langley’s shares a meeting of the new Board of Directors of Langley’s was convened which authorized the sale of all securities owned by Langley’s, the purchase of 11,000 shares of Gibraltar Mines Ltd. for $49,500, the purchase from First Montreal of the outstanding shares of a Quebec company, Advertising Associates, for $400,000, and the subscription by Langley’s for 10,000 shares in Beauport Financial at $10 per share. Further steps were taken and as a result Beauport Financial received from Langley’s $790,000 which it loaned to Beauport Holdings to complete by Beauport Holdings the purchase of Langley’s. The issues were whether the $790,000 was expended in furtherance of the bona fide business interests of Langley’s, or merely in advancing the personal interests of the accused, and whether Langley’s suffered deprivation as a result of this action. The accused were tried and convicted of defrauding Langley’s of money and valuable securities to a value of $1,190,000 contrary to s. 338 of the Criminal Code, however the Court of Appeal set aside the conviction. Leave was granted to appeal to the Supreme Court on the question as to whether the Court of Appeal had erred in holding that there was no evidence of fraud to go to the jury and in its consideration of the applicability and scope of the principles of law in Cox and Paton v. The Queen,  S.C.R. 500, as they related to each accused.
Held: The appeal should be allowed.
From Cox and Paton it is apparent that proof of deceit is not essential to support a conviction under s. 338(1). Where it is alleged that a corporation has been defrauded by its directors deception is not an essential element of the offence. The words “other fraudulent means” in s. 338(1) include means which are not in the nature of a falsehood or a deceit and they encompass all other means which can properly be stigmatized as dishonest. While the courts have been loath to attempt an exhaustive definition of “defraud” one can say that two elements are essential, “dishonesty” and “deprivation”. Using the assets of the corporation for personal purposes rather than bona fide for the benefit of the corporation can constitute dishonesty in a case of alleged fraud by directors of the corporation. Deprivation is satisfied on proof of detriment, prejudice or risk of prejudice; it is not essential that there be actual loss. On the facts it was here open to the jury to find that the exchange of the Langley portfolio for a loan was something other than a quid pro quo. The Court of Appeal erred in its consideration of the applicability and scope of the principles of law in Cox and Paton v. The Queen as they related to each accused and in holding that there was no evidence of fraud to go to the jury.
Cox and Paton v. The Queen,  S.C.R. 500; R. v. Lemire,  S.C.R. 174; R. v. Renard (1974), 17 C.C.C. (2d) 355; Scott v. Metropolitan Police Commissioner,  A.C. 819; R. v. Sinclair,  1 W.L.R. 1246; R. v. Allsop (1976), 64 Cr. App. R. 29; R. v. Smith,  1 C.C.C. 68; Welham v. D.P.P.,  1 All E.R. 805; R. v. Knelson and Baran (1962), 133 C.C.C. 210; R. v. McKay,  S.C.R. 3 applied.
APPEAL from a judgment of the Court of Appeal for Ontario setting aside convictions under s. 338 of the Code by judge and jury and entering verdicts of acquittal. Appeal allowed, new trial directed.
D. Ewart, for the appellant.
D.K. Laidlaw, Q.C., and Colin Campbell, for the respondent, Hudson.
R.P. Armstrong and S.R. Block, for the respondent, Hartnett.
The judgment of the Court was delivered by
DICKSON J.—The respondents were tried and convicted before judge and jury on the charge of defrauding Langley’s Limited, between December 1, 1971, and December 31, 1971, of money and valuable securities having an aggregate value of $1,190,000, more or less, contrary to s. 338 of the Criminal Code. Section 338(1) makes it a crime to defraud the public or any person of any property, money or valuable security by deceit, falsehood or other fraudulent means. The word “defraud” is not defined.
The Court of Appeal for Ontario set aside the conviction and entered a verdict of acquittal. This Court granted leave to appeal from the order of the Court of Appeal for Ontario upon the following question of law:
Did the Ontario Court of Appeal err in holding that there was no evidence of fraud to go to the jury and, in that connection, did it err in its consideration of the applicability and scope of the principles of law in Cox and Paton v. The Queen,  S.C.R. 500 as they related to each accused?
The judgment in Cox and Paton is helpful in considering the substantive offence of fraud although the relevant count under discussion in that case was conspiracy to commit fraud and not the substantive offence itself. In Cox and Paton, the accused had entered into an option agreement for the purchase from the principal shareholder, one Donaldson, of all of his shares in the capital stock of a company known as Brandon Packers Limited. The option agreement declared the stated intention of the optionee (the accused) to procure that Brandon Packers Limited would issue bonds to the extent of $400,000 for sale, and the optionor, Donaldson, agreed to use his best endeavours to promote the sale of the bonds. The option was exercised. Prior to closing, about $275,000 of the bonds had been sold. At closing, numerous steps were taken, including a daylight loan from a chartered bank, but essentially what occurred was this: (i) Donaldson caused Brandon Packers to subscribe for preference shares of the value of $200,000 in the capital stock of Fropak Limited, a company controlled by the accused; (ii) with the
monies received upon such subscription, Fropak advanced $183,560 to two personal holding corporations owned and controlled by the accused; (iii) the personal corporations paid Donaldson $183,560 for, and took delivery of, his shares in Brandon Packers Limited; (iv) Fropak received promissory notes from the two personal corporations totalling $183,560. In the result, Donaldson received in cash the purchase price of his shares. The accused, through their personal corporations, acquired those shares. Brandon Packers Limited had expended $200,000 for preference shares of Fropak Limited, and Fropak was left with promissory notes of the two personal holding corporations in the amount of $183,560, plus $6,440. In substance, Brandon Packers Limited became the source of the funds used by the accused to purchase Donaldson’s shares and acquire control of Brandon Packers Limited.
The Test for Fraud
The paragraph in Cox and Paton which particularly concerns us in the present appeal is to be found in the judgment of Cartwright J., speaking for the Court, at pp. 512-513, reading:
In the course of argument on this branch of the appeal counsel for the appellants submitted that there was no evidence that the appellants defrauded Brandon Packers Limited or that they intended to do so because, as it was said, there was no evidence of any false representation made to the company or of any official of the company having been deceived into parting with the moneys referred to in the particulars furnished. Assuming, without deciding, that there was a dissent on this point within the meaning of s. 597(1) of the Criminal Code, I would reject this argument, I will examine it only in connection with the transaction relating to the $200,000 which is the first item in the particulars. I have already indicated my agreement with the statement of Freedman J.A. that “implicit in the entire transaction was the representation of the accused that this was a legitimate bona fide investment for Brandon Packers Limited to make” and with his view that there was ample evidence to warrant a finding that this representation was false to the knowledge of the accused. If it deceived Donaldson, who was still nominally at least in control of the company, into paying over the $200,000 to Fropak that would be a fraud on the company. If, on the other hand, it is suggested that Donaldson was not deceived but paid the money over knowing that the
transaction was not bona fide, that the Fropak shares were worthless and that their purchase was merely a step in a scheme to enable the accused to buy the shares of Brandon Packers Limited with his own money, that would simply be to say that Donaldson was particeps criminis. If all the directors of a company should join in using its funds to purchase an asset which they knew to be worthless as part of a scheme to divert those funds to their own use they would, in my opinion, be guilty under s. 323(1) of defrauding the company of those funds. Even supposing it could be said that, the directors being “the mind of the company” and well knowing the true facts, the company was not deceived (a proposition which I should find it difficult to accept), I think it clear that in the supposed case the directors would have defrauded the company, if not by deceit or falsehood, by “other fraudulent means”.
In Cox and Paton the guilt of the accused rested essentially on the conclusion that the investment of $200,000 in the shares of Fropak was not a legitimate bona fide investment for Brandon Packers. It is apparent from the quoted passage that proof of deceit is not essential to support a conviction under s. 338(1). Where it is alleged that a corporation has been defrauded by its directors, deception of the corporation is not an essential element of the offence. The words “other fraudulent means” in s. 338(1) include means which are not in the nature of a falsehood or a deceit; they encompass all other means which can properly be stigmatized as dishonest.
In R. v. Lemire, the accused was charged with having defrauded the public through the submission of fictitious expense accounts. Mr. Justice Martland, writing for the majority of this Court, dealt with the argument that no one was deceived by the expense accounts because they did not contain a detailed list of the expenditures as contemplated by the form used in making a claim. He said, pp. 185-186: “Whether or not they deceived the people who saw them, they were the necessary means used to obtain the payments and without
them the payments would not have been made. They were fraudulent.” See also R. v. Renard, at p. 358.
In Scott v. Metropolitan Police Commissioner, the House of Lords held that in the common law offence of conspiracy to defraud, deceit is not a necessary ingredient, although in a great many cases the fraud may have been perpetrated by deceit. In the course of his speech, Viscount Dilhorne, with whom Lord Reid, Lord Simon of Glaisdale and Lord Kilbrandon agreed, after referring to the Criminal Law Revision Committee’s Eighth Report on “Theft and Related Offences,” 1966 (Cmnd. 2977) had this to say, at p. 839:
If, as I think, and as the Criminal Law Revision Committee appears to have thought “fraudulently” means “dishonestly”, then “to defraud” ordinarily means, in my opinion, to deprive a person dishonestly of something which is his or of something to which he is or would or might but for the perpetration of the fraud be entitled.
Lord Diplock spoke to the same effect, at p. 841:
The intended means by which the purpose is to be achieved must be dishonest. They need not involve fraudulent misrepresentation such as is needed to constitute the civil tort of deceit. Dishonesty of any kind is enough.
In the earlier English case of R. v. Sinclair, the defendants were charged with conspiring to cheat and defraud a company, its shareholders and creditors by fraudulently using its assets for purposes other than those of the company, and by fraudulently concealing such use. The judge directed the jury as to fraud, saying, at p. 1249:
To prove fraud it must be established that the conduct was deliberately dishonest. In the circumstances of this case what sort of test should be applied as to whether the conduct was dishonest? It is fraud if it is proved that there was the taking of a risk which there was no right to take which would cause detriment or prejudice to another.
The defendants were convicted and appealed. The Court of Appeal, in upholding the convictions, had this to say, at p. 1250:
To cheat and defraud is to act with deliberate dishonesty to the prejudice of another person’s proprietary right. In the context of this case the alleged conspiracy to cheat and defraud is an agreement by a director of a company and others dishonestly to take a risk with the assets of the company by using them in a manner which was known to be not in the best interests of the company and to be prejudicial to the minority shareholders.
The general direction as to fraud in the summing-up commences by stating that to amount to fraud the conduct must be deliberately dishonest. That is plainly right.
Courts, for good reason, have been loath to attempt anything in the nature of an exhaustive definition of “defraud” but one may safely say, upon the authorities, that two elements are essential, “dishonesty” and “deprivation”. To succeed, the Crown must establish dishonest deprivation.
Using the assets of the corporation for personal purposes rather than bona fide for the benefit of the corporation can constitute dishonesty in a case of alleged fraud by directors of a corporation. This proposition finds full support in Cox and Paton.
The element of deprivation is satisfied on proof of detriment, prejudice, or risk of prejudice to the economic interests of the victim. It is not essential that there be actual economic loss as the outcome of the fraud. The following passages from the English Court of Appeal judgment in R. v. Allsop in my view correctly state the law on the role of economic loss in fraud, at pp. 31, 32:
Generally the primary objective of fraudsmen is to advantage themselves. The detriment that results to their victims is secondary to that purpose and incidental. It is “intended” only in the sense that it is a contemplated outcome of the fraud that is perpetrated. If the deceit which is employed imperils the economic interest of the person deceived, this is sufficient to constitute fraud even though in the event no actual loss is suffered and notwithstanding that the deceiver did not desire to bring about an actual loss.
We see nothing in Lord Diplock’s speech [in Scott] to suggest a different view. “Economic loss” may be ephemeral and not lasting, or potential and not actual; but even a threat of financial prejudice while it exists it may be measured in terms of money . . .
Interests which are imperilled are less valuable in terms of money than those same interests when they are secure and protected. Where a person intends by deceit to induce a course of conduct in another which puts that other’s economic interests in jeopardy he is guilty of fraud even though he does not intend or desire that actual loss should ultimately be suffered by that other in this context.
One of the dangers in this case is the risk of being overwhelmed by factual minutiae. Superficially, the facts are complicated. Stripped of unessential, it is clear what took place. I do not propose a detailed recital as, in my opinion, the appeal should be allowed and a new trial ordered, but to answer the question upon which leave to appeal has been granted it is necessary to sketch the relevant transactions. In late 1971, when the impugned events took place, Langley’s Limited was a dry-cleaning enterprise, long-established in the City of Toronto, owning a substantial portfolio of “blue-chip” securities valued at $1,443,460. The controlling interest in the company, comprising some 90% of the common shares, was owned by two estates and an individual represented by a chartered accountant, Mr. Leonard Johnston. In the autumn of 1971, Mr. Johnston was approached by one of the accused, Mr. Olan, President of First Montreal City Corporation Limited, for the purpose of discussing purchase of the controlling shares. The negotiations which followed led to an agreement under which the controlling common shares, and certain preferred shares, of Langley’s would be purchased by First Montreal for approximately $1,485,000 payable in cash. Toward the end of the negotiations, Mr. Johnston also met the
other two accused, Mr. Hudson, President and Director of Beauport Holdings, and Mr. Hartnett, Vice‑President and Director of Beauport Holdings and legal adviser to Mr. Hudson. Before the actual closing, First Montreal assigned all of its rights under the agreement to Beauport Holdings. Thereafter, Hudson and Hartnett played the dominant roles, aided in some respects by Olan, who, it was agreed, would receive a finder’s fee of approximately $67,000 for negotiating the sale. As at November 30, 1971, total current assets of Beauport Holdings amounted to $149,968.30 and total assets of the company amounted to $738,966.87. The closing of the purchase of the Langley’s shares was to have taken place on December 2, 1971, but the purchasers did not then have the money with which to close. Closing date was postponed.
Mr. Leslie Smith, Manager of a branch of Toronto-Dominion Bank located in Toronto, testified that in the month of December, 1971, he had two separate discussions with the three accused concerning the certification of a cheque in the amount of $1,025,000 to be drawn on the account of Beauport Holdings in that bank. The account had been opened on December 8, 1971. On the first occasion, there were no funds in the account, but Smith was advised that there was a deposit of $488,000 available and that the balance of the funds would be deposited later the same day. Smith refused to certify the cheque, as his modest credit limits of $10,000 unsecured and $20,000 secured did not permit him to authorize an overdraft in the amount of the shortfall of $537,000. On the second meeting, the respondents asked for certification of a $1,025,000 cheque on conditions which proved to be acceptable to Smith. It was agreed that he would be present at the closing and retain possession of the cheque until such time as the purchase of Langley’s had been completed, at which time the accused would take possession of the Langley’s portfolio, sell the securities, and with the proceeds cause Langley’s to buy another company they owned.
On December 10, 1971, the accused completed, through Beauport Holdings, the purchase of approximately 90% of the Langley’s common shares; the preferred shares were purchased later. In satisfaction, the vendors received the certified cheque for $1,025,000, drawn on the account of Beauport Holdings, plus $246,545, being the proceeds of a loan from one Orenstein to Beauport Holdings. Upon payment being tendered, the accused were handed a briefcase containing all of the stocks and bonds owned by Langley’s. The briefcase was immediately turned over to two representatives of a brokerage firm who, accompanied by Smith and Hudson, and possibly Olan, went to the office of the brokerage firm where a cheque in the amount of $500,000 was issued, payable to Langley’s. This cheque represented the first instalment of the proceeds from sale of the securities.
I should here mention that, prior to the closing, the respondents Hudson and Hartnett caused to be incorporated, on November 23, 1971, a company under the name of Beauport Financial Corporation Limited, of which Hartnett became President and Director. Immediately following the purchase of the Langley’s shares from the former owners on December 10, a meeting of the new directors of Langley’s, namely Hudson, one Teeter, and one Joseph, was convened at which four items of business were transacted. The first, headed “Sale of Securities,” involved the passage of a resolution authorizing Hudson to sell all the securities owned by Langley’s. The actual resolution was preceded by these few words:
The Chairman suggested that in view of certain plans which he had for the Corporation it would be advisable that its investment portfolio be liquidated.
The second item authorized the purchase from Beauport Holdings of 11,000 shares in the capital of Gibraltar Mines Ltd. for $49,500. The third item involved the purchase from First Montreal of the outstanding shares of a Quebec company, Advertising Associates Limited, for $400,000. The final item authorized Langley’s to subscribe for 10,000 shares in the capital of Beauport Financial at a price of $10 per share.
Later the same afternoon, at a meeting of the board of directors of Beauport Financial, attended by Hartnett and Teeter, it was explained that when the Corporation was organized it was intended to be a wholly-owned subsidiary of Langley’s. A resolution was passed authorizing issuance to Langley’s of up to a maximum of 99,997 shares of Beauport Financial at a price of $10 per share. Another resolution was passed authorizing the officers of the corporation to make loans to Beauport Holdings. By the end of the day Langley’s had become a subsidiary of Beauport Holdings and Beauport Financial had become a subsidiary of Langley’s. Beauport Holdings thus became the top company in the corporate structure.
The money used by Beauport Holdings to take over Langley’s, according to Hartnett, came from:
—a deposit of $88,000 into the account of Beauport Holdings,
—a loan of $400,000 from Hudson,
—a loan of $400,000 from First Montreal,
—a loan of $100,000 from Beauport Financial,
—the sale of 11,000 shares of Gibraltar Mines by Beauport Holdings to Langley’s for $49,500.
These monies were sufficient to meet the certified cheque for $1,025,000. Additionally, there was the loan from Orenstein.
In response to a demand for particulars the Crown alleged that the $1,190,000 referred to in the charge was made up as follows:
(1) Payment by Langley’s Limited to the First Montreal City Corporation on or about December 10, 1971, in the amount of four hundred thousand dollars ($400,000.00);
(2) Payment by Langley’s Limited to Beauport Financial Corporation Limited on or about December 10, 1971, in the amount of one hundred thousand dollars ($100,000.00);
(3) Payment by Langley’s Limited to Beauport Financial Corporation Limited on or about December 14, 1971, in the amount of two hundred and ninety thousand dollars ($290,000.00);
(4) Payment by Langley’s Limited to Beauport Financial Corporation Limited on or about December 27,
1971, in the amount of four hundred thousand dollars ($400,000.00).
The purchase of the shares of Advertising Associates no longer seems to be regarded by the Crown as being the subject of fraudulent acquisition. The case, therefore, turns on items (2), (3), and (4). Item (2) refers to the share subscription by Langley’s for shares in Beauport Financial. Item (3) arose in these circumstances. On December 14, 1971, the sum of $290,000 was paid by Langley’s to Beauport Financial and a like sum was paid by Beauport Financial to First Montreal. At trial, it was common ground that the price paid by Langley’s for the shares of Advertising Associates had been later reduced to $350,000 from $400,000. Olan, through First Montreal, had earlier purchased the shares of Advertising Associates for $300,000, with a $10,000 deposit It was the Crown’s contention that the $290,000 paid by Langley’s to Beauport Financial to First Montreal on December 14 was in payment of the Advertising Associates’ shares and that the $400,000 paid by Langley’s to First Montreal on December 10, following sale of the Langley’s portfolio, and loaned on the same day by First Montreal to Beauport Holdings, was for the purpose of putting Beauport Holdings in funds wherewith to complete the purchase of the Langley’s shares and not in payment of the shares of Advertising Associates. Item (4) relates to the repayment out of funds originating in Langley’s of the loan of $400,000 by Hudson to Beauport Holdings. As a result of transactions (2), (3) and (4), Beauport Financial received from Langley’s the sum of $790,000 which it in turn loaned to Beauport Holdings enabling Beauport Holdings to complete the purchase of Langley’s.
The conflict in this case is essentially very narrow. It centres simply on whether there was evidence upon which a jury properly instructed could find beyond reasonable doubt that Langley’s suffered deprivation from dishonest action of respondents. To show this narrowness of the dis-
pute, it is necessary only to quote the argument of the accused respondents. First, the respondent Hartnett:
73. It is respectfully submitted that the Crown failed to prove any deprivation of Langley’s. The respondent does not take issue with the appellant’s submission that economic loss is not a necessary ingredient in the offence of fraud. It is respectfully submitted, however, that in a case where no economic loss is shown, the Crown must establish other facts to show that the victim of a fraud was dishonestly deprived of something. The evidence adduced in the present case does not establish such deprivation. The appellant says deprivation was shown in two ways. First, it submits that corporate assets were used for personal purposes and were therefore not available for corporate purposes such as other investments or maintaining a stable financial base. It is submitted that in fact, the Crown proved at trial that Langley’s portfolio had been turned into other investments and that at the date of those investments, there was no evidence that such investments would fail to provide a stable financial base.
Secondly, the appellant has submitted that deprivation was shown in that the corporate assets were put at risk. The risk taken, according to the appellant arose from the exchange of $1,190,000.00 in liquid assets for $49,500.00 worth of Gibraltar shares, $350,000.00 of Advertising Associates shares and $790,000.00 of shares of Beauport Financial. The evidence shows that the shares of Gibraltar and Advertising Associates were valuable assets. Further, the evidence establishes that the purchase of $790,000.00 worth of shares in Beauport Financial and Beauport Financial’s loan of $790,000.00 to Beauport Holdings were proper business transactions and that at the time of the loan from Beauport Financial to Beauport Holdings, Beauport Holdings had substantial assets sufficient to cover the amount of the loan.
Next, the respondent Hudson:
16. Consistent with its application of Cox and Paton v. The Queen to the facts of this case the Court of Appeal for Ontario held that the Crown in the case at bar had failed to satisfy the onus on it of showing the dubious nature of the promissory notes given to Beauport Financial, and further held that there was no evidence to go to the jury from which they could conclude that the value of those notes was so tenuous and illusory as to taint the whole transaction with fraud.
17. At the very best, even on the test proposed by the appellant some prejudice or risk of prejudice must be conclusively provided in order to result in a finding of
dishonesty. When a charge arises in circumstances where all the directors of the corporation are said to have defrauded the corporation there must be proof that the corporation was deprived of something to which it was entitled without having obtained something in return which could be reasonably regarded as quid pro quo.
The issues are whether the $790,000 of Langley’s’ assets used to purchase shares in Beauport Financial were expended in furtherance of the bona fide business interests of Langley’s, or expended in advancing the personal interests of the accused, and whether Langley’s suffered deprivation, in the sense described above, as a result of this action. There can be no doubt that the purchase of the controlling block of Langley’s shares could not have been effected without utilization of the Langley’s’ portfolio. But this is not decisive. Beauport Holdings would appear to have contributed from its own assets the sum of $88,000, plus the shares of Gibraltar Mines worth $49,500. Again, this is not decisive. The question is whether there was evidence that the accused dishonestly deprived Langley’s for personal ends. Was the investment of $790,000 by Langley’s in its subsidiary, Beauport Financial, with that money to be loaned by Beauport Financial to Beauport Holdings to enable Beauport Holdings to acquire control of Langley’s, a legitimate investment for Langley’s to make? Did this investment cause detriment, prejudice, or risk of prejudice to Langley’s?
The principal asset, indeed almost the only asset, of Beauport Financial was the indebtedness to it of Beauport Holdings. Therefore, the worth of the investment by Langley’s in Beauport Financial is determined by the ability of the ultimate recipient of the funds, Beauport Holdings, to repay the moneys loaned. It should be noted that this loan was by way of unsecured demand notes. The issue thus resolves into an examination of the ability of Beauport Holdings to repay on demand the loan of $790,000 made to it by Beauport Financial.
It was not necessary for the Crown to establish that the investment in Beauport Financial was “worthless”, to use the term of Cartwright J. in Cox and Paton, or of “negligible worth”, to use
the words of Freedman J.A. in the same case. I do not think that Cartwright J. intended to lay down the proposition that in order to sustain a charge of fraud, it must be shown that the victim of the fraud was caused to exchange something of worth for something entirely without worth. On the evidence in Cox and Paton, it was open to the jury to conclude, in the opinion of Cartwright J., that Fropak Limited had no assets of any value. In that case, the detriment was plain and entire. The question to be determined in each case is rather whether there was deprivation caused in furtherance of personal ends. The Crown contends that the case of Cox and Paton and the case at bar are on all fours, that there are minor points of difference, but essentially the cases are symmetrical. In Cox and Paton, the victim, Brandon Packers, was caused to buy shares of Fropak, a company revived for the purpose of the transaction, which loaned the funds to the private companies of the accused, enabling those companies to purchase the controlling shares of Brandon Packers. In the case at bar, the alleged victim, Langley’s, was caused to buy shares in Beauport Financial, a company incorporated for the purpose of the transaction, which loaned funds to Beauport Holdings, with which at least two of the accused were closely associated, enabling Beauport Holdings to purchase the controlling shares of Langley’s. In Cox and Paton, it was open to the jury to find that the promissory notes given by the two personal holding companies of the accused to Fropak were of little or no worth. Yet those companies would appear to have ended up with the shares earlier owned by Donaldson and, to that extent, could not be said to be worthless. In the present case, Beauport Holdings ended up with the controlling shares of Langley’s. To that extent, there is a further similarity in the two cases.
In Cox and Paton, there was evidence that the covenant to repay given by the personal corporations was of little value. In the case at bar, the ability of Beauport Holdings to repay on demand a loan in the amount of $790,000 is the critical issue. Ability to repay is not determined by asset value alone, but rather by an appraisal of the entire financial position of the debtor, including both
assets and liabilities. As we are here concerned with a demand loan, the relationship between current assets and current liabilities is of particular importance.
The jury had before it, as Exhibit 3, the audited balance sheet of Beauport Holdings as at December 31, 1971 which showed, as at that date, current assets of $16,953 and current liabilities of $1,164,415. The asset side of the balance sheet consisted of (i) the current assets ($16,953); (ii) an investment, being the down-payment on an option to purchase the shares of another company ($250,000); (iii) the investment in Langley’s ($1,378,810); (iv) mining claims situated in the Northwest Territories ($250,000); (v) deferred pre-production expenditures ($19,691), and (vi) organization expenses ($4,613). The current liabilities of $1,164,415 included the demand notes payable to Beauport Financial ($793,205) and the Orenstein note payable February 8, 1972 ($250,000). Included also under liabilities were shareholders equity represented by capital stock ($805,648), contingency reserve ($12,500) and deficit ($62,496). According to the financial statement, Beauport Holdings sustained a net operating loss during the nine months ended December 31, 1971 in the amount of $278,020. Current liabilities exceeded current assets by $1,147,462. It was open to the jury faced with this evidence, and with no evidence that the value of the mining claims exceeded book value, to find that the net worth of Beauport Holdings was such that it would have been quite impossible for the company to have repaid on demand the loan of $790,000, or even any substantial part of this amount. It was thus open to the jury to find that the investment of $790,000 in the shares of Beauport Financial was made to the clear detriment of Langley’s. It was open to the jury to ask this question—what possible legitimate business reason could have prompted the disposal by Langley’s of a portfolio of high quality securities and, in effect, the substitution therefor, as to $790,000, of unsecured demand promissory notes of a company with a working capital deficit of over $1,100,000 and over which company Langley’s had no control?
There is further evidence which bears upon Beauport Holdings’ ability to repay. The resolution passed by the Board of Beauport Financial, authorizing loans to Beauport Holdings, and the discussion which preceded it, read as follows:
Loan to Beauport Holdings Limited
The chairman then presented an application of Beauport Holdings Limited for a line of credit and loans from this Corporation. Unaudited financial statements of Beauport Holdings Limited, one immediately before and one immediately after the acquisition of 13,453 shares of common stock of Langley’s Limited were presented and examined. It was pointed out that Beauport Holdings Limited now owns approximately 90% of the voting stock of Langley’s Limited and Langley’s Limited in turn owns all of the issued and outstanding shares of this Corporation. There followed a lengthy discussion particularly as to how Beauport Holdings Limited proposes to repay any loans to it by this Corporation. It was pointed out that the 13,453 common shares of Langley’s Limited will be free and clear when Beauport Holdings pays the loan from Charles Orenstein In Trust in full; that a loan from a bank at a lower interest rate is probably feasible with said 13,453 shares as collateral because Langley’s Limited owns valuable real property free and clear of any liens and in view of the earning power of Langley’s Limited. As an alternative Langley’s Limited can declare substantial dividends to its stockholders the proceeds of which can be used by Beauport Holdings Limited to pay its indebtedness to this Corporation. Mr. Hartnett pointed out that he is a director of Beauport Holdings Limited and therefore disqualified himself from voting. Upon motion duly made and seconded, it was unanimously:
RESOLVED that the officers of this Corporation be and they hereby are authorized, from time to time, to make loans in such amounts and on such terms as they deem to be in the best interest of the Corporation to Beauport Holdings Limited.
It was open to the jury to find to be false the statement that the 13,453 common shares of Langley’s Limited would be free and clear when Beauport Holdings paid the loan from Charles Orenstein In Trust in full. At the date of the meeting Beauport Holdings was also in debt to Hudson in the amount of $400,000 and in debt to First Montreal City Corporation in the amount of $400,000. Equally, it was open to the jury to find
in the quoted passage, expressing the views of the participants themselves, cogent evidence of the kind of assets Langley’s acquired in substitution for its investment in high quality marketable securities. It would appear that, when the loans were made, the only way in which those controlling Beauport Financial could see Beauport Holdings fulfilling its loan obligation, owed in substance to Langley’s, was either in effect (i) by mortgaging the property and business of Langley’s itself, or (ii) by Langley’s paying the money to itself by declaring a dividend to Beauport Holdings which would then pay Beauport Financial which would then pay Langley’s. On this evidence, it seems to me that a jury could find that the loan was other than a stable, secure and bona fide investment for Langley’s. If Langley’s should have encountered financial difficulties, it should have been able to call in the loan immediately for an injection of additional working capital. Before the accused came into the picture, with its portfolio intact, a substantial fund of liquid assets was available to Langley’s. The loan to Beauport Holdings could only be realized by Langley’s placing its own property at risk, or paying itself money which it clearly would not have in a situation of financial difficulty. In short, in my opinion, it was open to a jury to find that the exchange of the portfolio for the loan was something other than a quid pro quo.
I wish to turn now to the judgment of the Court of Appeal for Ontario. That Court was of the view that Cox and Paton v. The Queen was distinguishable on a number of grounds. Briefly these were: (i) for its cash assets, Brandon Packers obtained shares whose value was negligible; (ii) implicit in the transaction was the representation that the investment in shares of Fropak was a legitimate bona fide investment for Brandon Packers to make; (iii) the two private companies of Cox and of Paton, which obtained the shares of Brandon Packers, gave promissory notes to Fropak to repay Fropak for moneys advanced to the two companies to buy the controlling shares of Brandon Packers from Donaldson; (iv) in Cox and Paton it was the Crown’s theory at trial that Brandon Packers had made loans to companies controlled by Cox and
Paton which were not only unauthorized, but without any intention that they should be repaid; in the instant case, not only was there abundant evidence of authorization but, also, there was no evidence that the accused did not intend that Beauport Holdings should repay to Beauport Financial the loans which had been made to Beauport Holdings; (v) in Cox and Paton the Crown alleged that the accused had caused Brandon Packers to pay $208,750 in alleged management fees for negligible services.
Point (i) refers to value, as to which I will have more to say in a moment. With respect, point (ii) is not distinguishing, as implicit in the case at bar is the representation that the investment by Langley’s in Beauport Financial and the loan by Beauport Financial to Beauport Holdings of the moneys so invested was a legitimate bona fide investment for Langley’s to make. In the minute book itself, appears the statement that this investment would be advisable “in view of certain plans which he [the Chairman—Hudson] had for the Corporation”. But that is all that appears. The evidence is silent as to justification. Why was it a legitimate bona fide investment? What was the reason for liquidating Langley’s portfolio? In my opinion, it was proper for the judge at trial to leave it to the jury to decide whether the respondents honestly believed that the disposal of the portfolio and re-investment of the proceeds was in the best interests of Langley’s. Point (iii), in my opinion, does not raise any distinguishing feature. In the instant case, Beauport Holdings (of which Hudson and Hartnett were President and Vice‑President, respectively), gave promissory notes to Beauport Financial (Fropak in the Cox and Paton case) to “repay” (the word used by the Court of Appeal for Ontario) Beauport Financial for moneys advanced to Beauport Holdings to buy the controlling shares of Langley’s. Point (iv) raises the question of intention to repay. In Cox and Paton, this Court did not find it necessary to deal with the point. In any event, an intention to repay has never been of avail in the past in negating fraud if the conduct of the accused is otherwise shown to involve dishonest deprivation for personal ends. An intention to repay might, at most, be relevant at sentencing. Point (v) also, in my view, fails to distinguish. It
may have been an aggravating feature in Cox and Paton, but as noted in the judgment of the Court of Appeal for Ontario in the case at bar, the Court of Appeal in the Cox and Paton case did not find it necessary to pass upon the question of whether the evidence was sufficient to justify the theory of the Crown in respect of the management fees.
After discussing the points which, in his opinion, distinguished this case from Cox and Paton, Mr. Justice Arnup, writing for the Court, accurately stated the question to be answered by that Court, as follows:
…was there evidence of an intention by the appellants to cheat Langley’s, and to transfer for fraudulent purposes the liquid investment portfolio of Langley’s for the benefit of the appellants?
To answer that question, the Court of Appeal considered it necessary to make some examination, as I have attempted to do, of the financial position of Beauport Holdings. In doing so, the Court first rejected the proposition advanced by counsel for Hudson, that having regard to the financial statement of Beauport Holdings before the transaction took place, it was in a position to purchase, for the price which was paid, the shares of Langley’s. The Court then conceded that “undoubtedly the investment, indirect as it was, in Beauport Holdings was much more speculative than the shares sold out of the investment portfolio of Langley’s”. If that is so, it would seem to me to go some considerable distance in supporting the contentions of the Crown that it was proper to leave the case to the jury. Where there was this sort of evidence and no evidence in justification, the question of whether the exchange of a secure investment for one “much more speculative”, constituted detriment in the circumstances was one for the jury alone to answer.
The Ontario Court of Appeal made three findings: (i) in no way could it be said that the assets of Beauport Holdings were worthless, or even of negligible value; (ii) its assets were of substantial value; (iii) there was no evidence fit to go to the jury that the value of the asset was so tenuous and illusory as to taint the whole transaction with fraud. In my opinion, with great respect, the Court
of Appeal erred in these findings. First, it erred in law in applying a test of “worthless” or “negligible”. The proper question was whether there was detriment or prejudice to Langley’s. Second, it erred in its assessment of the asset position of Beauport Holdings which, apart from the Langley’s shares, consisted of a $250,000 deposit, committed to another project, and some mining claims. None of those assets could be regarded as a current asset readily available for payment of a demand loan. Third, it erred in ignoring the liability position of Beauport Holdings and, in particular, the current liabilities which exceeded $1,160,000. In assessing ability to pay, the liabilities of the debtor are of equal or perhaps greater importance than the assets.
In my opinion, in answer to the question of law referred to this Court, the Court of Appeal for Ontario erred in holding that there was no evidence of fraud to go to the jury and in its consideration of the applicability and scope of the principles of law in Cox and Paton v. The Queen as they related to each accused. In my view, there was evidence to be left to the jury as to each of the accused.
Although not raised in any of the factums, an oral argument was advanced to the effect that this Court lacked jurisdiction to hear the present appeal because, as I understand the argument, we were concerned only with sufficiency of evidence and sufficiency of evidence raises only a question of fact, not appealable to this Court. In my view, the Court has jurisdiction. The question is not one of sufficiency of evidence but whether there is any evidence to go to the jury. This is a question of law: see R. v. McKay. In the present case, the judgment of the Ontario Court of Appeal reads in part:
As I have indicated, it is our conclusion that at the end of the Crown’s case the trial Judge ought to have ruled that there was no evidence to go to the jury on
Count 1, and should have directed the jury that they were to bring in a verdict of not guilty on all three counts of the indictment and not merely counts 2 and 3.
Additionally, it is the duty of this Court to give the judgment which the Court below should have given.
I would accordingly allow the appeal, set aside the judgment of the Court of Appeal and direct a new trial. Apart from the issue here under consideration, the Court of Appeal found errors in the trial judge’s charge to the jury warranting a new trial. Leave to appeal to this Court was limited to the one issue set forth earlier in these reasons. The other issues which, in the opinion of the Court of Appeal, warranted a new trial, were not canvassed before this Court.
Appeal allowed, new trial directed.
Solicitor for the appellant: F.W. Callaghan, Toronto.
Solicitor for the respondent Olan: David D.K. Rose, Toronto.
Solicitors for the respondent Hudson: McCarthy & McCarthy, Toronto.
Solicitors for the respondent Hartnett: Tory, Tory, Toronto.