Executive Summary: Key Legal and Evidentiary Issues

• Section 236 of the Business Corporations Act allows the court to require a corporate plaintiff to post security where it appears unable to pay a successful defendant's costs.
   
• Bruush Oral Care Inc. admitted it could not pay the applicants' costs if its claim failed and identified no exigible assets.
   
• Pleaded defences, including denial of breach of duty and causation, contributory negligence, and failure to mitigate, met the low threshold for an arguable defence.
   
• Contested readings of a 2022 Audit Report and an email from Robert Ward about a March 2024 board resolution could not be resolved on the limited record.
   
• Any role the applicants may have played in the plaintiff's impecuniosity was weighed when setting quantum rather than treated as a bar to the order.
   
• Indemnity agreements obliging the company to advance expenses, including security for costs, were considered relevant to the balance of interests without the court deciding their enforceability.
   

Facts of the case

Bruush Oral Care Inc. sued five former officers and directors, including Kia Besharat and Robert Ward, in the Supreme Court of British Columbia. Its claim arises from fraudulent schemes allegedly carried out by its former CEO, Aneil Manhas, who is not named as a defendant. Bruush says the schemes caused losses of over $20 million. None of the defendants is alleged to have participated in or profited from the schemes; the claim is that they breached various duties by failing to detect, prevent, and/or investigate the alleged fraud.

Besharat and Ward applied for security for costs. Bruush opposed the application, and the remaining parties took no position. In doing so, Bruush admitted it would be unable to pay the defendants' costs if its claim failed and did not point to any exigible assets. It also did not argue that an order would stifle its claim or that the application was brought late. Its opposition rested on two points: that the applicants had no arguable defence, and that ordering security would be inequitable because its financial hardship was caused by the very conduct at issue in the action.

Policy and legislative provisions at issue

Section 236 of the Business Corporations Act provides that where a corporation is the plaintiff and it appears it will be unable to pay a successful defendant's costs, the court may require it to give security and may stay the proceeding until security is given. The court applied the framework from Integrated Contractors Ltd. v Leduc Development Ltd. and the discretionary principles in Kropp v Swaneset Bay Golf Course Ltd., including that the court should avoid detailed assessment of the merits unless success or failure appears obvious, and that security may be ordered in any amount up to the full sum claimed so long as it is more than nominal.

The applicants relied on mandatory indemnification provisions in the company's Articles and in indemnity agreements with Bruush. Section 1.1 of the agreements requires the company to indemnify the indemnified party "to the fullest extent permitted by applicable law" against Expenses and Liabilities incurred in proceedings arising from their role as director or officer, with "Expenses" defined to include costs, professional fees, retainers, and other reasonable expenses. Under section 2.1, those rights apply only if the indemnified party acted honestly and in good faith with a view to the company's best interests. Section 3.1 presumes good faith and places the burden of proving its absence on the company. Advances are governed by section 6.1, which, subject to section 6.2, requires the company on request to advance Expenses and Liabilities before final disposition, including where the indemnified party must pay or deposit money as security for costs. Bruush argued the agreements may be unenforceable under s 142 of the Business Corporations Act.

Reasoning and analysis

The court found the first stage of the test satisfied: Bruush is impecunious and offered no evidence of exigible assets. On the question of arguable defences, the court noted the threshold is quite low and that a forensic assessment of the merits is inappropriate at this stage. Unlike the flat general denial found insufficient in Integrated Contractors, the applicants pleaded several substantive defences: denial of breach of duty and causation; the responsibility of the CEO, the CFO, and bookkeeper Navdeep Hanspal; lack of the applicants' knowledge or authorization of the impugned transaction; contributory negligence and apportionment under the Negligence Act; failure to mitigate; and remoteness and foreseeability. Having found these sufficient, the court did not decide whether the indemnity agreements also operated as a defence.

Bruush argued the defences would obviously fail, but accepting that would have required the court to adopt Bruush's position on the standard of care applicable to the directors without expert evidence, and to prefer contested interpretations of the documents. Its main example was a 2022 Audit Report that it said identified a material weakness in internal controls over financial reporting, which it argued drew no response. Contesting that characterization, the applicants pointed to passages in which the auditors said certain risks had been reduced and that they had identified no fraud. The court observed that Bruush's own Notice of Civil Claim pleads that a CFO was appointed in 2023 and that the directors implemented a two-step approval process for transfers from the company's bank accounts. Whether those steps met the standard of care could not be resolved on the record.

A second argument concerned the period between the commencement of an action by TD Bank in June 2023 and the creation of a Special Committee in March 2024. Bruush pointed to board resolutions passed on March 8, 2024, ratifying a discretionary performance bonus of CAD $2,350,000 paid in cash to the CEO in May 2023, which it said were intended to relieve the CEO of liability to the company for the conduct that led to the TD action. The court was referred to an email from Ward stating that the resolution had been executed on the CEO's acknowledgment that the bonus had been returned before execution, that the external board members had relied on the CEO's claims without verifying them, and requesting an amended or new resolution. Bruush characterized the email as an attempt to mitigate liability rather than a genuine account of events. Without any evidence about the email, the court declined to adopt that interpretation and could not conclude that the applicants lacked bona fide defences.

On causation of the plaintiff's hardship, the court found that the direct cause alleged was the allegedly fraudulent conduct of Aneil Manhas, while the claim against the directors was less direct, resting on their alleged failure to detect or prevent that fraud. It held that the proper course was to order security and revisit this factor when setting the amount.

The applicants estimated their future costs at Scale B at approximately $100,000, including approximately $30,000 in disbursements, and sought that full sum. Bruush estimated approximately $52,000, with $130 for disbursements, and proposed $35,000. It objected to a $25,000 allowance for an expert report, but the court considered expert evidence likely, since the applicants can be expected to argue they met the standard of care as directors. Both bills of costs assumed a 15-day trial, while 20 days have been scheduled, leaving both estimates low by at least $8,250 based on the tariff units for trial preparation and attendance. Describing the matter as complex, high-value commercial litigation with sophisticated parties and serious allegations, the court found the applicants' estimate more realistic.

The indemnity agreements were treated as relevant to weighing the parties' interests. Unless the applicants acted dishonestly or in bad faith, Bruush has agreed to indemnify them for liability and Expenses and to make Advances before final disposition. The court did not decide the s 142 enforceability question, noting that this was not an application to enforce the agreements. Citing Iwasaki v Redford, it observed that dollar-for-dollar security has historically not been awarded because the figure claimed is always an early-stage estimate.

Ruling and overall outcome

Besharat and Ward succeeded on their application, and Bruush was ordered to post $80,000 as security for costs. That figure accounted for the estimate's failure to reflect the actual trial length, the possibility of settlement, the possibility that the applicants caused Bruush's impecuniosity, and uncertainty over whether the indemnity agreements will ultimately result in indemnification. Payment is to be made in three instalments into an interest-bearing trust account held by Bruush's solicitors: $20,000 within two weeks of the order, $20,000 at least two weeks before the next examination for discovery, and $40,000 no later than 60 days before trial, with proof of each deposit provided to the defendants' solicitors within five days. Until the first instalment is made, or where a required payment is missed, the action is stayed and Bruush is restrained from taking steps that would cause the defendants to incur costs until proof of deposit is provided. A default not rectified within 14 days opens the way to an application to dismiss the action, and liberty was also granted to apply for further security if needed. Costs of the application were ordered in the cause.