A recent decision from the Divisional Court of Ontario Superior Court of Justice set aside a trial judge’s order awarding $182,000 in damages for “loss of business value.” The defendants appealed the matter to the Divisional Court, where it was determined that the trial judge’s decision was grounded in facts and law. However, the Court found that the trial judge erred in principle when awarding damages relating to “loss of business value,” given the termination agreement between the parties.

Business Partners Agree to Terminate Business Relationship

In the case of Tahmasebi v. Hosseini, the parties were business partners and co-owners of a business called Curve Ltd. Between 2007 and 2011, the business bought and sold used cars and invested their profits in real estate. When the parties decided to terminate their business relationship in 2012, they agreed to sell the real estate and divide the profits equally. Concerning Curve Ltd., they decided that the company would be wound up, the remaining vehicles would be sold, and the net proceeds would be divided equally.

Shortly thereafter, one of the partners, Mr. Tahmasebi, brought an action against the other partner, Mr. Hosseini, and his wife and nephew. Mr. Tahmasebi alleged fraud and oppression relating to Curve Ltd. between 2009 and 2011 and sought an accounting of all funds owed to him.

Trial Judge Finds Evidence of Oppressive Conduct

At trial, the judge noted that the parties had addressed issues between them serially instead of comprehensively. The parties entered a share purchase agreement to sell shares in their jointly-owned companies. An agreed-upon amount was intended to be set off against interest payments owed by Mr. Hosseini regarding his purchase of shares in a numbered company. The appellants claimed that the parties agreed to terminate all business relations in March 2012.

The trial judge found that the parties did not reach a binding agreement regarding the business’s winding up, which was foreclosed before the hearing. However, he found evidence of oppressive conduct by Mr. Hosseini in his business and his management of Curve Ltd.’s operations. This was established by his failure to maintain proper financial records, using company funds to pay for personal expenses, and entering into undisclosed agreements.

The trial judge awarded Mr. Tahmasebi damages for $292,000, which included:

• $35,000 for “loss of profits on incremental sales”;
• $75,000 for Mr. Hesseini’s personal expenses paid for by Curve Ltd.; and
• $182,000 for “loss of business by Curve Ltd.”

Mr. Hosseini, Curve Ltd., and other associated business entities appealed the judgment to the Ontario Divisional Court.

Trial Judge Entitled to Make Award for Loss of Profits on Incremental Sales Given Nature of Oppression

The appellants argued that the trial judge erred in accepting the damage calculations prepared by Mr. Tahmasebi’s expert. They submitted that the calculations by the expert were flawed in several ways.

The Divisional Court confirmed that the trial judge was entitled to decide the case based on the evidence and case presented. The trial judge found that Mr. Tahmasebi’s expert utilized the documents the best she could. Therefore, the question was whether the methods used by the trial judge were made available to him on the evidence and whether the judge’s findings were consistent with the law.

Overall, the Divisional Court found no reason to interfere with the trial judge’s findings concerning the loss of profits in incremental sales and personal expenses paid by Curve Ltd. The Court stated that the trial judge “did the best with what he was given”, and the resulting award of $35,000 did “not offend common sense given the nature of the oppression found on which this award was based”.

Trial Judge’s Loss of Business Calculation Based on Correction to Inaccurate Financial Statements

Regarding the challenge to the loss of business value award, Mr. Tahmasebi’s expert valued his damages based on the fair market value of his shares as if Curve Ltd. were remaining a business. She based this on two components: the goodwill value of Curve Ltd. and an incorrect “due to shareholder” sum (shareholders’ loan) in the company’s financial statements.

The trial judge did not award damages related to goodwill because the parties agreed that the company would be wound up. As a result, the judge determined that Mr. Tahmasebi could not reasonably expect to recover any funds relating to the business’s goodwill.

The trial judge had further found that the shareholders’ loan listed in the company’s financial statements was inaccurate. The appropriate correction to this amount would significantly increase Curve Ltd.’s book value. It was this correction that the trial judge used to reach the amount of $182,000 in damages for “loss of business”.

Divisional Court Finds No Basis for Loss of Business Value Award

The Divisional Court found that the trial judge erred in ordering damages for loss of business value. The Court acknowledged that a trial judge has broad discretion under the Ontario Business Corporations Act when ordering a remedy for oppression. However, the Court cited previous case law (also referred to by the trial judge) that states that courts must “fashion a remedy that is minimally intrusive and as consistent as possible with the reasonable expectations of parties”.

The trial judge found oppression by Mr. Hosseini relating to undisclosed agreements and company-paid personal expenses. However, he did not find oppression linked to the misstatement of the shareholders’ loan amounts listed in the company’s financial statements. Therefore, this misstatement could not form the basis for damages for oppression.

Loss of Business Award Set Aside; Balance of Appeal Dismissed by Divisional Court

The Divisional Court found that since the parties agreed that the corporation would be wound up with profits divided equally, the fair market value of the shares and the corporation’s book value were irrelevant. As a result, the award for “loss of business value of Curve Ltd.” was inconsistent with the parties’ reasonable expectations.

Given these findings, Justice Corbett of the Divisional Court set aside the damages award of $182,000 for loss of business value. However, the Court dismissed the balance of the appeal. Given that the parties were each successful in their own right, no costs were awarded.

Milosevic & Associates Provides Exceptional Representation in Corporate Litigation and Appeals

At Milosevic & Associates, our corporate law lawyers have a broad range of experience assisting clients in complex commercial litigation, including oppression claims and representing litigants at an appellant level. Our team utilizes their wide range of expertise to ensure that clients’ business needs are met, and creative solutions are considered. We aim to mitigate legal and financial risks so clients can focus on running their businesses smoothly. Conveniently located in Toronto, our firm proudly serves clients throughout the Greater Toronto Area and across Ontario. To schedule a confidential consultation about your corporate litigation concerns, contact us online or call 416-916-1387.