Feng v Zhang 2019 BCSC 391

IN THE SUPREME COURT OF BRITISH COLUMBIA

LIN FENG
(Petitioner)

V

FENG ZHANG AND BERTON EDUCATION GROUP INCORPORATION
(Respondents)

 

[1]           These are the Court’s reasons on the hearing of the petition issued in this matter in March of 2016. After hearing submissions of the parties on August 16, 2018, I dismissed the petition with costs to the respondents following brief oral reasons for judgment. Counsel for the petitioner seeks written reasons for the dismissal of the petition, hence, these reasons.

[2]           The petition seeks several remedies against the corporate respondent, named as Berton Education Group Incorporation (“Berton Inc.”), including a declaration that the petitioner is a shareholder of Berton Inc., that the petitioner be reinstated as a director of Berton Inc., that the respondents deliver certain corporate records and documents to the petitioner, and in the alternative, an order that the respondents pay to the petitioner the sum of $320,000 which petitioner originally invested in a partnership entered into by the petitioner and the respondent, Mr. Zhang. The remedies described above and the several other remedies sought all relate to the internal affairs of Berton Inc.

[3]           In addition to hearing the petition, the claimant, Ms. Feng had submitted a notice of application seeking the petition be transferred to the trial list, that all necessary pleadings be filed and this proceeding, which was commenced by Ms. Feng, continue as if commenced by way of a notice of civil claim. In giving my decision, I rejected the need for the petition be transferred to the trial list. The issues raised in the dispute can be dealt with by reference to the affidavits and documents.

Factual Background

[4]           In the spring of 2012, the petitioner, Ms. Feng and the respondent, Mr. Zhang, entered into a partnership agreement in which they agreed to carry on a business as an ESL school, i.e., a school for persons for whom English is a second language.

[5]           The partnership agreement was set out in writing and dated March 3, 2012 but was not signed by the parties until March 2014. The terms of the partnership agreement included the following express terms:

  1. Mr. Zhang was entitled to a 49% share in the partnership, based upon his experience and knowledge of ESL schools.
  2. Ms. Feng was entitled to a 51% share in the partnership based upon a cash investment or contribution she was to make to the partnership in an amount of $500,000.
  3. The cash investment was to be made in three tranches, i.e., $200,000 before November 30, 2012, $200,000 before February 28, 2013, and a further $100,000 to be advanced to the partnership before September 1, 2014.

[6]           Other terms of the partnership agreement, which was headed and described as a “Partnership Agreement”, as translated and attached to the affidavit of Ms. Feng dated March 7, 2016 include:

Article 2 – The name of the partnership project is Berton College

. . . .

Article 5 – Capital contribution and share ratio of the Partners: Party A [Mr. Zhang] becomes a shareholder with his knowledge, accounting for 49% of the total equity, and Party B [Ms. Feng] becomes a shareholder with CAD $500,000 in cash, accounting for 51% of the total equity.

. . . .

Article 9 – Joining the Partnership

  1. When joining the Partnership, new partners must receive the consent from all the Partners;

. . . .

Article 11 – Share assign

The Partners are allowed to assign his/her shares in the Partnership, in whole or in part. . . .

Article 12 – Partner’s rights

  1. When distributing the interests of the Partnership, the Partners shall do so in proportion to the share or based on the stipulation in the contract. The property accumulated by the Partnership shall belong to all the Partners.

Article 13 – Partners’ obligations

  1. Maintaining the unity of the Partnership’s property according to the stipulation of the Partnership Agreement;
  2. Sharing the debt of the Partnership caused by the operation;
  3. Bearing the joint and several liability for the Partnership’s debt.

[7]           There was no mention of a limited liability company being incorporated in the language of the partnership agreement. The partnership was registered by Mr. Zhang as a partnership with the Registrar of Companies. Obviously, if there was no company incorporated there never were any shares issued. The use of the terms “shares” and “shareholders” in the partnership agreement is not consistent with a partnership agreement as opposed to a limited liability company. Reading the partnership agreement as a whole, it is apparent that Ms. Feng and Mr. Zhang entered into a partnership and did not become shareholders in a limited liability company. It is not clear whether the use of the terms “shares” and “shareholders” was a result of translation from Chinese as those terms seem inconsistent with a partnership.

[8]           Ms. Feng deposes that she had understood that Mr. Zhang would be incorporating a company to operate the business and it was not until 2014 that she realized the business had been registered as a partnership. She objected to signing the partnership agreement at first, but eventually signed the partnership agreement in 2014.

[9]            Ms. Feng contributed a total of $400,000 to the partnership between December 2012 and May 2013, however, she never did advance the last $100,000 called for in the partnership agreement.

[10]        Bank statements of the College attached to the affidavit of Ms. Feng of March 27, 2016 indicate an account in the name of “Berton College”.

[11]        In March 2013 the partnership, i.e., Ms. Feng and Mr. Zhang, entered into a five year lease agreement for premises on West Broadway in Vancouver which became the premises for the ESL school. The lease was attached as Exhibit “D” to the affidavit of Mr. Zhang made May 30, 2016 and described the lessee as “Berton College, A General Partnership Formed Under the Laws of the Province of British Columbia Comprised of Feng Zhang and Lin Feng” and was executed by both Mr. Zhang and Ms. Feng. The premises were improved and the business of the ESL school commenced at the West Broadway location in May 2013.

[12]        In June 2014, Ms. Feng demanded the partners incorporate a company to carry on the business of the ESL school and asked Mr. Zhang to arrange for the company to be incorporated. Mr. Zhang retained a lawyer to incorporate Berton Inc., to have Ms. Feng and Mr. Zhang appointed directors and to prepare documents for the shares of Berton Inc. to be allotted 51% to Ms. Feng and 49% to Mr. Zhang.

[13]        Ms. Feng refused to sign documents required for the incorporation of Berton Inc. including a consent to stand as a director.

[14]        Thereafter, Ms. Feng failed to advance the final $100,000 required under the partnership agreement which was to have been paid by September 1, 2014 and announced she was withdrawing from the partnership.

[15]        In December 2014, after Ms. Feng continued to avoid any involvement in Berton Inc., Mr. Zhang filed with the Corporate Registry a Notice of Change of Directors stating that Ms. Feng ceased to be a director as of the date of incorporation. In fact, Ms. Feng never did become a director of the company and presumably the initial filing was assuming she would become a director.

[16]        On February 6, 2015, after the personal parties had failed to resolve issues between them, Ms. Feng, being a signatory to the bank account, unilaterally withdrew $80,000 from the partnership bank account.

[17]        On February 12, 2015, Mr. Zhang and Ms. Feng resolved their differences and entered into a settlement agreement in which they agreed Berton Inc. would acquire the ESL school and Berton Inc. would assume all liabilities of the ESL school as of February 1, 2015 for the price of $320,000. The sum of $320,000 to be paid to Ms. Feng was agreed as the net amount of her original investment of $400,000 less the $80,000 she withdrew from the partnership account on February 6, 2015.

[18]        Also on February 12, 2015, Ms. Feng and Mr. Zhang executed a Business Takeover Agreement in which Berton College agreed to transfer its business to Berton Education Group Corporation, effective February 1, 2015. The Business Takeover Agreement referred to the personal parties to this action as owners of Berton College and that the transfer fee between Berton College and Berton Inc. will be $320,000.

[19]        In March of 2015, a new lease of the premises of the ESL school was entered into by Berton Inc.

[20]        Other than agreeing on a payment to be made to Ms. Feng for $320,000 after deducting the $80,000 which had already been paid to her, Ms. Feng and Mr. Zhang were unable to agree on how the assets of the partnership would be allocated between them.

[21]        A draft settlement agreement was prepared, however, Mr. Zhang and Ms. Feng were subsequently unable to conclude the settlement of their affairs in the ESL school. Included in their disagreement was a requirement of Ms. Feng that the entire sales proceeds would be paid to her as opposed to the partnership.

[22]        The respondents, i.e., Mr. Zhang and Berton Inc. purport to be ready, willing and able to complete the settlement.

Discussion

[23]        Firstly, based upon the documents prepared in 2012 and early 2013, the business of the ESL school in which Mr. Zhang and Ms. Feng invested time, expertise and funding, the business arrangement was a partnership and was treated as such. Documents supporting a partnership include bank statements, the “Partnership Agreement”, the filing with BC Registry Services in 2012 recognizing Mr. Zhang and Ms. Feng as partners, the City of Vancouver Business License for 2014, the Business Takeover Agreement, the lease of the school’s premises, the Cash Withdrawal Certificate signed by the partners referring to the partners as owners of the business and in the affidavit of Mr. Zhang.

[24]        While the partnership agreement refers to parties becoming shareholders and their respective equity, the use of this language is not descriptive nor determinative in light of the legal relationship the parties were actually forming.

[25]        After issues arose between the partners, Mr. Zhang instructed a lawyer to prepare incorporation documents anticipating that Ms. Feng would sign those documents and would become a shareholder and director. Although listed as a director at first, she never did consent as required by British Columbia’s Business Corporations Act, S.B.C. 2002, c. 57, s. 123, to stand as a director of the newly incorporated company.

Decision

[26]        As stated earlier in these reasons, Ms. Feng seeks multiple orders all of which relate to the affairs of Berton Inc. The following paragraphs set out the orders sought by the claimant, brief discussion regarding the same and the Court’s decision regarding the orders sought.

A declaration that the petitioner is a shareholder of Berton Education Group Incorporation

[27]        The claimant is not a shareholder of Berton Inc. and never was a shareholder. She was offered an opportunity to become a shareholder between July and September of 2014 when Mr. Zhang arranged for a lawyer to prepare incorporation documents. She refused to sign the same.

A declaration that the petitioner owns 51% of the shares in Berton Inc.

[28]        Shares were never issued in the name of Ms. Feng. It was contemplated she would become a shareholder in June of 2014, however, she declined to have any involvement in the company that was subsequently incorporated.

An order voiding the resolution, if any, removing the petitioner as a director of Berton Inc.

[29]        Ms. Feng never did become a director of the company although invited to be a director.

An order that the petitioner be reinstated as a director of Berton Inc. effective from July 4, 2014

[30]        As Ms. Feng was never a director, it would not be possible to reinstate her and in order to be a director, she was required to consent to be a director, which did not occur.

An order that the respondents provide to the petitioner the company records, minute book, material contracts, financial statements, and accounting records from the date of incorporation to the present

[31]        As Ms. Feng is not and has never been a director of Berton Inc., she has no entitlement to the documents listed over and above whatever documents may be available to the general public.

An order that the respondent, Mr. Zhang, provide to the petitioner all documents relating to the partnership of Berton College, from the date of registration of the partnership to present

[32]        Ms. Feng has, according to the evidence, been provided with financial statements, bank statements and other documentation she was entitled to as a partner of the original partnership to the time the business was transferred to the newly incorporated company.

An order that the respondents are restrained from selling or disposing of business assets

[33]        Ms. Feng seeks restraining order relating to assets and the carrying on of business of Berton Inc. As with the orders sought above, the claimant is not entitled to those remedies as she is not and has never been a director or shareholder of Berton Inc.

Alternative order sought

[34]        Regarding the order sought under #8, which is “In the alternative to paragraphs 1 and 2, an order that the respondents are jointly and severally liable to pay to the petitioner the sum of $320,000 plus court ordered interest, that application is also dismissed.

[35]        Since the hearing in August 2018, I am aware of a ruling of Mr. Justice Tammen made November 29, 2018 in which the learned Justice declined to grant a stay in this matter. Mr. Justice Tammen also referred to a commercial arbitration commenced by Mr. Zhang to resolve the allocation of partnership assets, “specifically the $320,000” and that Ms. Feng, through counsel, has participated in the selection of an arbitrator. Ms. Feng also sought a stay of the arbitrationproceedings, which was dismissed.

[36]        The petitioner is not entitled to costs, damages, or any other orders at this time.

Costs

[37]        Considering all of the above, the petition of the claimant is dismissed with costs to the respondents on scale B. It is apparent that an appropriate conclusion to this unfortunate dispute will be achieved through the arbitration proceedings dealing with distribution of partnership assets.