Executive Summary: Key Legal and Evidentiary Issues

• Allegations of fraud involving the fabrication of corporate documents to transfer shares and directorship of the plaintiff company, enabling the registration of three unauthorized mortgages on a property in Richmond, BC.

• An order nisi had already been granted in a separate foreclosure petition, declaring the Sandhu Mortgage registered against the lands in favour of Ms. Sandhu, with judgment of $303,131.45 plus costs against the plaintiff and Ms. Gill.

• Ms. Sandhu's application to strike the plaintiff's claims succeeded on the basis that the action constituted a collateral attack on the existing order nisi and an abuse of process under Rule 9-5(1)(d) of the Supreme Court Civil Rules.

• The plaintiff's negligence claim against Ms. Sandhu for failing to conduct due diligence was found to be implicitly an attack on the mortgage's validity, as it targeted the indoor management rule under s. 146 of the Business Corporations Act.

• Disputed correspondence between counsel created ambiguity over whether the foreclosure petition would be converted to an action and heard alongside the fraud claim, but the Court rejected the plaintiff's interpretation.

• Special costs were denied despite the finding of abuse of process, as the Court found no reprehensible conduct, awarding Ms. Sandhu ordinary costs at Scale B instead.

The facts of the case
1187331 B.C. Ltd., a company whose principals are Mr. and Ms. Ugre, purchased a property on River Road in Richmond, British Columbia, in December 2018 for $660,000, financed in part by a $491,250 mortgage from RBC. The Ugres allege they are and always have been the sole shareholders and directors of the plaintiff company. However, they claim that between December 2018 and 2020, the defendants Mr. Tarsem Singh Gill and Ms. Surinder Kaur Gill perpetrated a fraud by creating false documents that transferred 50% of the plaintiff's shares to Ms. Gill and registered her as the sole director of the company. With this fabricated authority, Ms. Gill placed three mortgages — referred to as the "Impugned Mortgages" — against the property. The plaintiff company states it never received nor benefited from the proceeds of any of these mortgages, and neither the plaintiff nor any of its directors ever had knowledge of, interacted with, or agreed to grant the Impugned Mortgages. Mr. Ugre states he is illiterate and cannot read, write, or speak the English language. He discovered the Impugned Mortgages registered on the property in about March 2023.
The Sandhu Mortgage and the foreclosure petition
One of the three Impugned Mortgages was the "Sandhu Mortgage," held by the defendant Ms. Manjeet Kaur Sandhu. Ms. Sandhu's evidence was that in about May 2019, Mr. Jitendra Desai, a notary with whom she had previously worked, contacted her and presented an opportunity to lend money to the plaintiff secured by a mortgage. She agreed and paid $250,000 to Mr. Desai. The Sandhu Mortgage was signed by Ms. Gill on May 17, 2019, as the authorized signatory of the plaintiff and as covenantor. According to filings at the BC Registry Services, Ms. Gill was the sole director of the plaintiff at that time. The mortgage proceeds were directed by Ms. Gill to be distributed to three parties: $86,500 to CTI Construction Testing & Inspection, $50,000 to "Vikram Shah," and $111,144 to Avero Developments Ltd., which the notice of civil claim alleges is owned by the Gills. Ms. Sandhu does not state whether she knew the Gills.
On August 23, 2023, Ms. Sandhu commenced a separate foreclosure petition (the "Sandhu Petition"). On December 21, 2023, Associate Judge Vos granted an order nisi, declaring that the Sandhu Mortgage is a "mortgage registered against the lands in favour of the Petitioner" and that there has been default under the mortgage, and ordering the amount to redeem. The redemption period was six months expiring June 21, 2024. Judgment was granted against the plaintiff and Ms. Gill for $303,131.45 plus costs. The entered order states that no one other than the petitioner appeared at the hearing.
Procedural history and the dispute between counsel
On May 29, 2024, Ms. Sandhu filed an application seeking an order for conduct of sale of the property. On June 18, 2024, the plaintiff filed a response raising the alleged fraud as a defence and, on the same day, filed its own application seeking to convert the Sandhu Petition to an action and place it on the trial list. On June 26, 2024, Ms. Sandhu's counsel in the Sandhu Petition, Mr. George Richards, sent an email to the plaintiff's counsel, Mr. Khushpal Taunk, confirming an agreement to each adjourn their respective applications. Mr. Taunk's understanding was that Mr. Richards agreed the Sandhu Petition would be put on the trial list, that he would be filing a new action concerning all the Impugned Mortgages, and that the two proceedings would be heard together. Ms. Sandhu's counsel disagreed, arguing that the email merely confirmed mutual adjournments and did not state the Sandhu Petition would be referred to the trial list. The Court found it could not make any determination of what was said between Mr. Taunk and Mr. Richards but noted that, viewed in isolation, the email did not state that Mr. Richards agreed the Sandhu Petition would be put on the trial list, and further, it would be inconsistent with the existing order nisi that the enforceability of the Sandhu Mortgage would be argued again. Both applications in the Sandhu Petition remain outstanding.
The plaintiff filed its notice of civil claim ("NOCC") in this action on August 15, 2024, suing the Gills, Mr. Paul Otto De Lange — who is alleged to have been the Gills' lawyer and who is no longer a lawyer — Mr. Naushad Ahmed, a lawyer, and the mortgagees of the Impugned Mortgages. The action against Mr. Ahmed was dismissed by consent at the beginning of the hearing.
Ms. Sandhu's application to strike
Ms. Sandhu applied to strike the allegations in the NOCC relating to her on three bases: first, pursuant to Rule 9-5(1)(d) of the Supreme Court Civil Rules, that the claims were an abuse of process constituting a collateral attack on the order nisi; second, in the alternative pursuant to Rule 9-6, that the claims were bound to fail because she does not owe a duty of care to the plaintiff and is protected by the indoor management rule in s. 146 of the Business Corporations Act; and third, she sought special costs or, in the alternative, costs. The plaintiff opposed the application and argued it should be adjourned to permit examinations of the defendants to determine whether Ms. Sandhu had a relationship with the Gills and whether she had actual or constructive knowledge of the alleged fraud.
The indoor management rule under s. 146 of the Business Corporations Act
A significant statutory provision discussed in the case is s. 146 of the Business Corporations Act, S.B.C. 2002, c. 57. This section provides that a company may not assert against a person dealing with it that, among other things, the individuals shown as directors in the corporate register are not the directors of the company, or that a person held out by the company as a director, officer, or agent has no authority to exercise the powers customary for that role. Under s. 146(1)(b), the plaintiff would be prevented from asserting against Ms. Sandhu that Ms. Gill was not a director of the plaintiff and therefore the Sandhu Mortgage is not valid. The exception under s. 146(2) disapplies this protection only in respect of a person who has knowledge, or by virtue of the person's relationship to the company ought to have knowledge, of the irregularity. The Court observed that the plaintiff's submissions were aimed at s. 146 and the indoor management rule, which goes to the root of the enforceability of the Sandhu Mortgage, and that these are arguments that should have been raised at the time of the order nisi. However, the Court did not make a determination on the merits of the s. 146 defence given its finding on abuse of process.
The Court's analysis on abuse of process and collateral attack
The Court relied on the doctrine of abuse of process and the rule against collateral attack, referencing Toronto (City) v. C.U.P.E., Local 79, 2003 SCC 63, Hollander v. Mooney, 2017 BCCA 238, Burnaby (City) v. Trans Mountain Pipeline ULC, 2014 BCCA 465, and Ba-Oose Inc. v. HSBC Bank Canada, 2011 BCCA 511. Per Ba-Oose, an order nisi in a foreclosure proceeding is a final judgment of the court; it cannot be granted unless the court is satisfied that the mortgage is both valid and legally enforceable. Once an order nisi is pronounced, it is not open to a mortgagor to challenge the validity of the mortgage by way of a separate action, as the facts necessary to determine enforceability become res judicata. The NOCC's claims against Ms. Sandhu — denying liability for repayment of the Sandhu Mortgage, seeking its discharge, and claiming damages for negligent due diligence — directly challenged what the order nisi had already decided. The negligence claim, although not an issue usually determined in a declaration of validity of a mortgage, was found to be implicitly an attack on the validity of the Sandhu Mortgage, as the plaintiff's submissions were aimed at establishing Ms. Sandhu's knowledge of the alleged fraud and thereby engaging the s. 146(2) exception to undermine the mortgage's enforceability. The Court held these issues should have been raised at the time of the order nisi.
Ruling and outcome
The Court ordered that paragraphs 37 and 56 in Part 1 of the NOCC, and paragraphs 1 and 4 of Part 2 of the NOCC — but only to the extent that they refer to the Sandhu Mortgage — be struck without leave to amend, finding those claims to be a collateral attack on the order nisi and an abuse of process. Given this determination, it was not necessary to address Ms. Sandhu's alternative application pursuant to Rule 9-6. On the question of costs, while the Court acknowledged that per Hollander, a "collateral attack is always an abuse of process" and that conduct constituting an abuse of process is "by its nature, reprehensible and deserving of rebuke," it declined to award special costs. The Court noted that there may have been some misunderstanding by plaintiff's counsel regarding what was agreed to by Mr. Richards when the applications were adjourned, that plaintiff's counsel planned to bring an application to set aside the order nisi, and that nothing led the Court to believe the action was brought for an improper purpose or to intentionally "sidestep" the order nisi. Ms. Sandhu was the successful party on this application and was awarded costs at Scale B; however, no specific monetary amount for those costs was determined by the Court in this decision.