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Paramount Fine Foods founder and CEO Mohamad Fakih at one of his restaurants in Mississauga, Ont. on May 1, 2020.J.P. MOCZULSKI/The Globe and Mail

A legal battle between the owners of the Paramount Fine Foods restaurant chain is heading to court, as the company’s largest shareholders seek to oust its founder, Mohamad Fakih, and restructure the money-losing business they claim he has treated as a “personal fiefdom.” But Mr. Fakih has called the motion an “act of oppression” designed to wipe out millions in personal loans he made to keep the company afloat.

A hearing is scheduled for Friday in Ontario Superior Court over a dispute between Mr. Fakih and two investors based in Kuwait, Ali Noureddine and Naeem Javed, who own a combined 75 per cent of the Toronto-based private company. The remainder is owned by Mr. Fakih and his family trust.

The majority shareholders say Paramount is insolvent and needs to be restructured. Mr. Fakih and his family trust own 25 per cent of the company’s equity, but he controls 50 per cent of the voting rights, and that has resulted in a “deadlock” over how to address the crisis, according to court documents.

This is preventing “rational decision-making” at Paramount, the shareholders contended in documents filed this week. If Mr. Fakih is not removed, they are asking the court to appoint a third director to resolve the impasse.

In his own filing on Wednesday, Mr. Fakih countered that the shareholders’ motion is “tactical,” arguing that he and his family trust were supposed to receive $16-million for the 75-per-cent stake he sold. Instead, that money was lent to Paramount during its financial difficulties. Mr. Fakih says what he is owed would be “erased” in a restructuring controlled by the shareholders.

The shareholders dispute this, saying Mr. Fakih ignored their requests to reduce Paramount’s costs, and took cash out of the business while it was struggling to “pay for his lavish lifestyle” with “inappropriate” expense claims such as personal car and mortgage payments.

Mr. Fakih has said these expenses were agreed upon in exchange for the personal loans he made to keep Paramount afloat during the COVID-19 pandemic. In Wednesday’s filing, he said the shareholders have “misled this court” by claiming he kept them in the dark about the expenses.

Mr. Fakih, who was made a member of the Order of Canada last year, founded Paramount in 2006 and expanded it into a chain of more than 30 Middle Eastern fast-casual restaurants, many of them operated by franchisees. Over the years, he also established himself as an outspoken entrepreneur promoting what he calls “kinder capitalism,” arguing that leaders can benefit from a compassionate approach to running their businesses.

In court documents, the majority shareholders say Paramount “has been in financial crisis for years,” losing money since at least 2015 and accruing mounting debt. They claim Paramount has not produced consolidated financial statements for a company spanning more than 30 subsidiaries, making it difficult to track intercompany transactions and draw an overall picture of its finances.

The legal dispute began in March, 2021, when Mr. Fakih filed a lawsuit against the investors in Ontario Superior Court, accusing them of withholding capital contributions to Paramount. Mr. Fakih wants the court to either order the men to make up these shortfalls, or to divest them of stakes in the business equivalent to those gaps.

He has asked that Mr. Noureddine be removed as a director, and is also suing for US$4-million that he says Mr. Noureddine owes on a promissory note. Mr. Noureddine has claimed that note was obtained improperly under false pretenses.

In a counterclaim, the shareholders say they invested in the business based on what they say were false claims by Mr. Fakih that Paramount was profitable. The two investors increased their stake in the business over time, and say that in total, they contributed about $25-million to Paramount between 2015 and 2021.

None of the allegations have been proven in court.

Mr. Fakih and the shareholders have failed to agree on a joint audit of the company, or who should pay for it. Each side has attempted to provide a sketch of those finances, raising objections from the other: Mr. Fakih asked accounting firm RSM Canada LLP to prepare an analysis of shareholder contributions to the company, but the majority shareholders say that this analysis failed to note withdrawals of money from Paramount to Fakih Group Inc., a company Mr. Fakih controls.

The shareholders’ factum cites bank records showing loans Mr. Fakih advanced to Paramount were often transferred back to Fakih Group: For example, out of $10.6-million in loans made between 2015 and 2018, $9.9-million were transferred back, they say.

It also cites an internal analysis prepared by two former finance executives at Paramount and shared with the investors in 2020, showing Fakih Group owed $6.9-million to Paramount, which Mr. Fakih disputes, saying they have produced no documentation.

This past summer, investors engaged insolvency trustee firm A. Farber & Partners Inc. to assess Paramount’s finances. The firm’s report said its access to Paramount’s records was limited, but it concluded the company was insolvent. Mr. Fakih has said the Farber report is incomplete and contains inaccurate information.

According to the shareholders, Mr. Fakih acknowledged in a letter that Paramount could not make payroll this past June, and he indicated that he was considering options, including placing some of the company’s subsidiaries into bankruptcy. They say Mr. Fakih subsequently refused to restructure Paramount, fearing it would compromise the money he says he is owed.

The fight is far from over. The underlying ownership issues at the heart of the dispute will be dealt with at a later date, while Friday’s hearing is focused on control of the company, and its possible restructuring, in the near term. The court will hear the motion to remove Mr. Fakih or to break the deadlock.

Mr. Fakih has responded by saying the shareholders are requesting extraordinary measures from the court based on claims that are “false, misleading and inflammatory.”