Canada: Court Of Appeal Comments On Reasonable Investigation Defence

Last Updated: October 30 2017
Article by Max Muñoz

Most Read Contributor in Canada, October 2018

The Court of Appeal's decision in Rahimi v. SouthGobi Resources Ltd., 2017 ONCA 719 ("SouthGobi  ") provides guidance with respect to the evidentiary burden on defendants who are relying on the reasonable investigation defence to defeat a leave motion.

SouthGobi involved exceptionally unusual facts. The story starts in a very usual way: SouthGobi announced that its financial statements were being restated, that it had weaknesses in its internal controls over financial reporting ("ICFR"), and that its previous financial statements should not be relied upon. The stock price plummeted and a class action was commenced under s. 138 of the Securities Act against the company and several individual directors and officers (collectively, the "defendants").

Then the story takes an unusual twist.  In court filings, the defendants took the position that the financial statements were not inaccurate and did not need to be restated. They submitted that the company only restated its financial statements because it needed to complete a financing and the SEC and others would not let the financing proceed unless they issued the restatement.

Motion Decision

The motion judge allowed the claim to proceed as against SouthGobi but denied leave as against the individual defendants on the basis of the reasonable investigation defence. Both the plaintiff and the company appealed.

Appeal Decision

Two issues were considered on appeal by the Court: (i) did the motion judge err in denying leave against the individual defendants?; and (ii) did the motion judge err in granting leave against the company?

The Court of Appeal overturned the motion judge's decision as against the individual defendants and granted the plaintiffs leave to proceed against all of the defendants. In essence, the Court of Appeal held that in circumstances where there has been a restatement and public admission that there were weaknesses in the company's ICFR, the evidence will need to be very persuasive that the reasonable investigation defence will succeed.

The Court of Appeal made a number of statements in this regard, but to properly understand them, a little more context is required. A few of the key facts are as follows:

  1. While the defendants were taking the position that the financial statements were not inaccurate and that there were no materials weaknesses in the company's ICFR, neither the company nor the individual defendants provided any evidence that they had objected to the restatement or the subsequent press release; nor did they "correct" what they were now asserting was a false press release. The position taken by the parties in the litigation versus the restatement and press release was "so jarring", according to the Court of Appeal, that the motion judge should have granted leave against all of the defendants.1
  2. The individual defendants also argued that they relied on the advice of the company's external auditors throughout the class period. No affidavit evidence was filed by either Deloitte or PWC in this respect, however.
  3. In their affidavits filed on the leave motion, the individual defendants asserted that one of the primary reasons for the restatement was that the SEC required revenue to be reported in accordance with GAAP. Not all of the evidence filed, however, was consistent with this position. For example, the Board of Directors minutes from the meetings that took place at the time of the restatement made no reference to GAAP or to a SEC-mandated move. In addition, expert evidence filed by the plaintiff called into question the truthfulness of the individual defendants' assertion.

The above facts all raised credibility issues that the Court found were not considered by the motion judge. It was not a case where there was truly uncontroverted evidence adduced by a defendant in support of a reasonable investigation defence.

Writing for the Court, Justice Hourigan noted that a motion judge must weigh and scrutinize the evidence put forward by both parties, not just that of the plaintiff. In so doing, however, the motion judge is not restricted to a review of the evidence filed on the motion. According to Justice Hourigan:

[The motion judge is also obligated to consider what evidence is not before her. She must be cognizant of the fact that, at the leave stage, full production has not been made and the defendant may have relevant documentation that has not been produced or relevant evidence that has not been tendered. Consideration of these evidential limitations of the leave stage is important because they can work to the prejudice of the plaintiffs who have potentially meritorious claims.2]

Equally important, according the Court, is an examination of any credibility issues. Where these are significant, as the Court found was the case here, the proper course for a motion judge is not to treat a leave motion as a mini-trial and make a decision based on the limited record before her, but rather to grant leave because there is no certainty that the reasonable investigation defence will succeed.3 In holding that the motion judge erred in the above respect, the Court further noted that he should have considered "the gaps in the evidence and the evidence that conflicts with the contents of the affidavits filed on the leave motion."4

With respect to the restatement and the press release, the Court held that this was "powerful" evidence that the financial statements of the company were unreliable throughout the class period. Such evidence, it noted, "strongly...contradict[ed] a defence of reasonable investigation".5


SouthGobi is a case with unique and unusual facts, and therefore its application as precedent may be limited. However, the decision is a useful addition to the jurisprudence interpreting the leave standard in s. 138 cases, and reinforces the fact that the Court will take an objective view of the totality of the evidence, and of the gaps in the evidence, and consider whether it is reasonable in the circumstances to shut the case down before a full record is made available to plaintiffs.


1 SouthGobi at para 81.

2 Ibid at para 48.

3 Ibid at para 50.

4 Ibid at para 51.

5 Ibid at para 68.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions