Are the directors of a corporation which has been placed into
receivership entitled to retain counsel on behalf of the
corporation without prior approval of the Receiver or the
According to a recent decision of the Ontario Court of Appeal,
the answer is "Yes".
In The City of Peterborough v. Kawartha Native Housing
Society Inc., Ontario's highest Court noted that boards of
directors of companies placed in receivership retain residual
powers. Powers which the receiver-manager is not authorized to
exercise by the relevant Court Order (or terms of private
appointment) remain vested in the directors. Barring a resignation,
directors remain in office and can exercise functions.
Further, whatever their residual authority may be, the board of
directors continue to have an obligation to act in the
best interest of the corporation. If, in their opinion, the
appointment of a receiver is not in the best interest of the
corporation, or if they believe that the steps being taken by the
Receiver on behalf of the corporation are not in the
corporation's best interest, then they are entitled to retain
counsel to bring the matter to the attention of the court. It will
be for the court to decide if the board has acted responsibly and
reasonably in doing so.
That said, the right to retain counsel by the board of a
corporation in a receivership scenario is not unfettered. The court
ruled that if, for example, a lawyer is retained for a purpose that
has the effect of interfering with the receiver's legitimate
duties as an officer of the court, or the receiver's duties as
the manager of the ongoing operation of the corporate enterprise,
then the retainer is not appropriate.
The Court of Appeal went on to emphasize that "there are no
blank cheques". The court will decide whether a board is to be
reimbursed for the legal expenses in taking a particular course of
action. In exercising its discretion to make a cost award in favour
of a board of a corporation in a receivership, the court will
consider whether the board was acting in the interest of the
corporation and whether the position advanced by the board was
properly advanced by the board rather than by the receiver.
In Kawartha Native Housing, the Court of Appeal
concluded that it was clear that the positions advanced by counsel
for the board were properly advanced by the board rather than by
the receiver. Counsel were taking positions adverse to the receiver
and were entitled to retain and properly pay legal counsel for
services rendered out of the assets of the corporation.
For a copy of the decision in The Corporation of the City of
Peterborough v. Kawartha Native Housing Society Incorporated,
et al please contact the author.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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