Executive Summary: Key Legal and Evidentiary Issues

• Defendants applied for security for costs of $44,737.50 against the corporate plaintiff under s. 236 of the Business Corporations Act, alleging the plaintiff would be unable to pay costs if the defence is successful.

• The plaintiff, an Alberta-based company operating as Zoom Painting, owned no real estate in British Columbia and held only easily transportable, encumbered assets with no evidence of liquid assets.

• Two asset lists provided by the plaintiff showed discrepancies in both the reported values and locations of the claimed assets within the jurisdiction.

• All corporate assets were encumbered by personal property charges held by the Bank of Nova Scotia and Business Development Bank of Canada, with unknown amounts advanced by either institution.

• Future contracts valued at $5,762,084 were deemed speculative and insufficient to establish the plaintiff's ability to satisfy a potential costs award.

• The plaintiff failed to address whether its directors, shareholders, or other backers could fund the required security, leaving its stifling argument unsubstantiated.

The underlying construction dispute

The Wallin Company Inc., operating as Zoom Painting, entered into a subcontracting agreement with Knappett Projects Inc., the head contractor, to supply painting materials and labour regarding construction of an apartment building owned by Fiera (Gorge) Holdings Corp. The plaintiff relied on the provisions of the Builders' Lien Act, S.B.C. 1997, c. 45 and alleged breach of contract, seeking judgment in the sum of $192,716.35. The defendants denied that they breached the contract and further denied any sums were owing to the plaintiff. The defendants also filed a counterclaim against the plaintiff. The action was described by the court as being in its infancy.

The defendants' application for security for costs

Knappett Projects Inc. and Fiera (Gorge) Holdings Corp. brought an application in the Supreme Court of British Columbia seeking an order requiring the plaintiff to post security for costs in the sum of $44,737.50, along with a stay of the action until the security was posted. The legal basis for the application was s. 236 of the Business Corporations Act, S.B.C. 2002, c. 57, which permits the court to require a corporate plaintiff to post security for a defendant's costs where it appears the corporation will be unable to pay those costs if the defendant is successful in the defence. The court applied a two-stage test: first, whether the defendants established a prima facie case that the plaintiff had insufficient assets in the jurisdiction to pay costs if the action fails; and second, whether the plaintiff could rebut that case by demonstrating sufficient assets, the absence of an arguable defence, or undue hardship that would stifle the action and prevent its case from being heard.

The plaintiff's financial position and asset evidence

The plaintiff is an Alberta company that despite past operations in British Columbia only recently registered as an extra-provincial company in British Columbia. The court noted that the registration appears to have been undertaken in response to the application. It was undisputed that the plaintiff did not own any real estate in British Columbia. The plaintiff pointed to future contracts which it said had a contract value of $5,762,084, and equipment it said had a value of $166,850. The plaintiff also submitted that it had, or was in the process of, resolving an Alberta judgment of approximately $52,000, although evidence confirming this was not put before the court. The court noted some disparity between two asset lists the plaintiff provided with respect to the location and value of the assets — for example, a Dodge Caravan was valued at $10,000 in the February list but $12,000 in the March list, and a Haulette Lift was given a value of $75,000 in February and $85,000 in March. With respect to the location of assets, the February list included a $35,000 Genie Lift as being located in British Columbia; however, the March list did not include this asset. The court found the assets, consisting primarily of vehicles and painting sprayers, were easily transportable and that it would take little time for the plaintiff to move these assets out of the jurisdiction. The evidence indicated the assets were frequently transported between British Columbia and Alberta based on the plaintiff's operational needs.

Encumbrances and the absence of liquid assets

More importantly, the court found that all corporate assets were encumbered by personal property charges registered in Alberta. The Bank of Nova Scotia had a charge registered against all present and after-acquired personal property of the plaintiff, and Business Development Bank of Canada also had a charge registered against all present and after-acquired personal property of the plaintiff. It was not known how much had been advanced by either institution. The plaintiff submitted that the court should not consider this security as it had not been perfected in British Columbia. However, the court rejected this reasoning, finding it unlikely that the creditors had been given notice that the equipment was being used for business operations in British Columbia given the plaintiff's very recent extra-provincial registration. The court further observed that the plaintiff's position seemed to suggest it could avoid its obligations to its creditors by relocating assets — the very issue the defendants sought to address by the application. The court also found that the impact of the future contracts on the plaintiff's ability to satisfy a costs award was speculative and subject to many factors, including whether the contracts would be profitable. The court concluded there was no evidence before it that the plaintiff currently had any liquid assets.

Whether the plaintiff demonstrated security should not be required

With the prima facie case established, the burden shifted to the plaintiff to demonstrate that security should not be required. The court found the corporate assets were not sufficient to satisfy an award of costs as they were encumbered by two security interests, and the plaintiff had not disclosed the sums owing to its creditors, thereby failing to establish sufficient equity in the corporate assets. On the question of an arguable defence, the court observed that in its response to civil claim, the defendants pleaded that the plaintiff did not complete its contractual scope of work, that work was deficient, that the plaintiff caused delays on the project, and that the plaintiff charged amounts contrary to the contract. The court could not conclude that the defendants had no arguable defence to the plaintiff's claims. On the stifling argument, the plaintiff submitted that ordering security for costs would stifle its ability to bring its claim forward but anticipated that its financial position would improve over time. However, citing Kropp v. Swaneset Bay Golf Course Ltd., the court noted that it should consider not only whether the plaintiff company could provide security out of its own resources, but also whether it could raise the amount needed from its directors, shareholders, or other backers or interested persons. The plaintiff had not addressed whether it could raise the amount needed from its directors or shareholders and therefore failed to establish that a security for costs order would stifle its ability to pursue its claims.

The counterclaim and its impact on the security amount

The plaintiff argued that costs relating to the counterclaim should not be recoverable, and that the $10,000 sought for an expert report relating to the delay claims was not reasonable. The court acknowledged, citing Parkbridge Lifestyle Communities Inc. v. New West Custom Homes (Kelowna) Inc., 2022 BCCA 299, that the existence of a counterclaim should not result in the dismissal of the application for security but that its existence is a proper factor to consider in determining the amount. The court found that the issues raised as a defence and those included in the counterclaim were interwoven, as is typical in construction litigation, and that the counterclaim did not add any additional issues that were not included in the defendant's response to civil claim. The court therefore determined that a reduction in the security to account for the counterclaim should be minimal. Regarding the expert report, the court found it common in construction litigation for parties to retain experts and saw no reason to conclude this case would be different. The court did, however, note that the defendants had sought tariff items at the complex or high level on several occasions, and that the litigation was in its infancy with no indication it would be unusually complex. A small reduction to the amount was deemed appropriate to adjust for this.

The ruling and outcome

Justice LeBlanc exercised discretion in favour of the defendants, ordering the plaintiff to post security for costs in the sum of $40,000. The plaintiff's action was stayed until the security is posted, and if the plaintiff does not post security within 45 days of the date of the reasons, the defendants are at liberty to bring an application to have the plaintiff's action dismissed. The plaintiff's request for staggered payments was declined, given the absence of any evidence on the plaintiff's ability to raise funds from directors, shareholders, or others. The defendants were awarded their costs of the application in the cause.