Canada: Indemnification Claims Under The CCAA

Last Updated: January 30 2013
Article by Denise D. Bright, David F. Phillips and Chris D. Simard

Indemnification clauses are often considered a critical component of risk mitigation strategies in legal relationships. However, as is well understood, the value of an indemnification clause, in the event it becomes applicable, is dependent on the underlying financial viability of the entity granting the indemnity.

A critical consideration in any claim for indemnity in an insolvency proceeding is whether the claim is determined to be based in debt or equity. Both prior and subsequent to the September 2009 amendment to the definition of “equity claim” in the Companies’ Creditors Arrangement Act (CCAA),1 the courts have been reducing the ability of parties to recover pursuant to an indemnity where it is, directly or indirectly, related to an “equity interest”. Indemnification claims by purchasers of flow through shares in relation to the loss of tax benefits, the claims of directors and officers in relation to shareholder litigation claims and, most recently, underwriters’ and auditors’ claims for indemnity in the context of shareholder lawsuits have been considered equity claims.

In light of the difficulties associated with the enforcement of a contractual indemnity in the context of an insolvency proceeding, due diligence and insurance procedures should remain primary risk management strategies.


In Canadian insolvency law, it has long been settled that a claim to the equity of a corporation is subordinate to a creditor’s claim in debt. Consequently, a shareholder has an economic interest in an insolvent corporation only after the creditors are repaid in full. Under the CCAA, the term “equity claim” is used to describe this subordinated claim.

Since September 2009, the CCAA has defined “equity claim” broadly to include claims for dividends or similar payments, return of capital, redemption or retraction payments, a claim for monetary loss resulting from the purchase or sale of an equity interest and a claim for a contribution or indemnity made in respect of any of the foregoing.2 In the case of a corporation, “equity interests” are generally defined as shares in the corporation, or a warrant or option or another right to acquire a share of the corporation, other than one derived from convertible debt.3

While equity claims are clearly subordinate to those of creditors under the CCAA, prior to the 2009 amendments to the CCAA several court decisions considered cases where the claim was not directly attributable to any equity holder but rather arose pursuant to a contractual right associated with a claim involving the legal or contractual rights of equity holders.

Prior to the introduction of the current statutory definition of “equity claim”, the Court in National Bank of Canada v Merit Energy Ltd.4 held that where subscribers under a flow-through share issue were attempting to exercise their rights to indemnification under a subscription agreement (for loss of the flow-through benefits and related tax penalties), those claims were in substance equity claims. By contrast, the indemnity claims of the officers, directors and underwriters were found to be creditors’ (i.e., not “equity”) claims. This decision was affirmed by the Alberta Court of Appeal, but the result has now been superseded by the amendments to the CCAA and overruled in the Sino- Forest decision (below).

In EarthFirst Canada Inc. (Re),5 purchasers in a flow-through share offering sued on the corporation’s covenant to indemnify them for any taxes payable under the Income Tax Act (Canada) as a consequence of EarthFirst breaching its obligation to renounce certain qualifying expenditures. The Court determined that any shareholder claims arising in respect of an indemnity provided by an issuer in a flowthrough share offering would be treated as equity claims under the CCAA claims process.

In Nelson Financial Group Ltd.,6 the Court confirmed that the claims of preferred shareholders for declared but unpaid dividends and unperformed requests for redemption were equitable interests rather than claims in debt, after an extensive analysis of the terms of the preferred shares to confirm that they were equity interests (as defined in the CCAA).

In Return on Innovation Capital Ltd. v Gandi Innovations Ltd.,7 the Court analyzed, among other things, the claims for indemnity advanced by persons who were directors/officers. The Court relied heavily on Nelson (above) and determined, notwithstanding the fact that the claims for indemnity were based on litigation alleging breaches of contract, torts and equitable rights, that the underlying purpose of the litigation was the recovery of an investment, thus the claim for indemnity was an equitable claim. This case was referred to in the recent Sino-Forest case (below).

Court Analysis of the CCAA 2009 Amendments

Recently, in conjunction with CCAA proceedings involving Sino-Forest Corporation, the Ontario Superior Court of Justice was asked to consider whether a right to indemnification granted to the auditors and underwriters in relation to lawsuits by equity holders arising in respect to public offerings of equity (not debt) and other public disclosure documents was a claim in debt pursuant to contractual rights or a claim in equity.

In Sino-Forest Corporation (Re),8 the Court conducted an indepth analysis of the current provisions of the CCAA and the prior case law. Focusing on the nature of the underwriters’ and auditors’ claims, the Court held that the indemnity was tied to the shareholders’ claims for monetary loss resulting from the purchase or sale of shares of Sino-Forest. Therefore, the underwriters and auditors could have no greater claim and could be in no better position than the shareholders of Sino-Forest in the CCAA proceedings. The Court focused on the nature of the claim and not the identity of the claimant. It should also be noted that the Court differentiated between the indemnity for the shareholder claims and the costs incurred to defend in the event the claim by the shareholders was unsuccessful. It is possible that defense costs would give rise to a claim that is not an equity claim if the shareholders’ claims failed.

On November 23, 2012, the Ontario Court of Appeal dismissed an appeal by the underwriters and auditors.9 Applying the expansive language of the CCAA, the Court of Appeal upheld the decision of the Superior Court.


The decision in Sino-Forest is a good reminder that once a corporation seeks protection under the CCAA, many stakeholders may not be able to effectively enforce contractual indemnities received from the corporation if their claim represents an equity claim. Unfortunately, due to the definition of “equity claim” in the CCAA, an indemnity might be meaningless just when it is needed most. It should be noted that the limitation on recovery under an indemnity is limited to an action against the corporation in respect of its equity and would not necessarily limit a recovery against another party.

From a legal perspective, this new ruling confirms the broad application of the revised CCAA regime with respect to equity related indemnity claims. Until further consideration by the courts, underwriters, auditors, other third parties, directors and officers should carefully consider the risk of liability and the level of due diligence necessary to provide real, lasting protection against shareholder claims.

Readers are reminded that, under securities legislation in force in the various Canadian provinces, each underwriter, every director and every person who signs the certificate in a prospectus, offering memorandum or take-over bid circular (usually the Chief Executive Officer and the Chief Financial Officer) and certain other persons have civil liability with respect to the applicable disclosure document.10 Those documents often incorporate other documents by reference; liability extends to the disclosure in those other documents. There are statutory exceptions from liability that apply in cases where a person relied on an expert or conducted an investigation sufficient to provide reasonable grounds to believe there was no misrepresentation or did not believe that there was a misrepresentation.11 Experts whose report, statement or opinion contains a misrepresentation are also protected, unless the person did not conduct an investigation sufficient to provide reasonable grounds for the belief that there was no misrepresentation or believed that there was a misrepresentation.12

The provincial securities acts in Canada also impose liability with respect to disclosure in public documents, public oral statements and failure to make timely disclosure—the so called secondary market civil liability regime. For example, misrepresentations in core public documents results in a right of action for damages against, among others, each director and each officer who authorized, permitted or acquiesced to the release of the document.13 A person is not liable with respect to misrepresentations in core public documents under the secondary market liability regime if that person proves that, before the release of the document, he/she conducted or caused to be conducted in a reasonable investigation and, at the time of the disclosure, he/she had no reasonable grounds to believe that the document contained a misrepresentation.

Securities legislation14 sets out factors that a court will consider in determining whether an investigation was reasonable, including (among other items) the nature of the issuer, the knowledge and experience and function of the person, the office held if that the person was an officer, the existence and the nature of any system designed to ensure the issuer meets its disclosure obligations and the reasonableness of reliance by the person on the disclosure compliance system and the responsible issuer’s officers, employees and others whose duties, in the ordinary course, would give them knowledge of the relevant facts.

The due diligence process in the context of public markets transactions has become somewhat mechanical. The use of due diligence checklists, which have evolved over the years in response to issues identified in connection with prior transactions, is both appropriate and necessary, as they help to ensure a minimum level of due diligence. However, it is important that a well thought out due diligence plan be developed at the early stages of a transaction and that experienced personnel take the time to identify areas of potential material risk and customize the due diligence plan in light of that analysis and the specific transaction. The due diligence defense afforded by securities legislation in force in Canada is predicated upon the conduct of meaningful due diligence investigations. Simply recycling the due diligence plan from a prior transaction (and delegating conduct of due diligence solely to junior personnel) is not optimal from a risk mitigation perspective. The due diligence process should be comprehensive and responses and the related disclosure should be assessed considering both the specific circumstances of the entity and the market as a whole. The due diligence defense has been held to be unavailable in circumstances where the due diligence process was formulaic and inadequate to identify reasonably foreseeable risks.

We believe that individuals and organizations involved in public markets transactions should view the due diligence process as a critical risk mitigation strategy. The equity holders may have contractual and equitable rights in the event of a misrepresentation (or failure to disclose) in addition to the statutory rights granted pursuant to provincial securities laws. We recommend that underwriters, agents, other third parties, directors and officers consult with legal counsel and carefully consider their risk exposure and mitigation strategies beyond the protection of a contractual indemnity. This should include a review and understanding of the issuer’s internal control procedures related to information disclosure and, in the case of directors and officers, a review of insurance policies to consider whether the coverage is sufficient.


1 RSC 1985, c C-36.

2 CCAA s. 2(1).

3 CCAA s. 2(1).

4 2001 ABQB 583, aff’d, 2002 ABCA 5.

5 2009 ABQB 316.

6 2010 ONSC 6229.

7 2011 ONSC 5018, leave to appeal refused, 2012 ONCA 10.

8 2012 ONSC 4377.

9 2012 ONCA 816.

10 See Securities Act (Alberta) (ASA) Sections 203, 204 and 205.

11 ASA Section 203(6).

12 ASA Section 203(7).

13 ASA Section 211.03.

14 ASA Section 211.04(7), for example.

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.

Denise D. Bright
In association with
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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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