Canada: Creditor Claims Against Corporations and Directors: Canada’s Supreme Court Highlights Importance of the Oppression Remedy

In an important decision released on October 29, 2004, the Supreme Court of Canada has provided direction on the duties that are owed by directors of Canadian corporations to creditors and other stakeholders. In addition, while the Peoples case did not involve claims for oppression remedies, there is no doubt that the Supreme Court’s decision will significantly influence future litigation involving this statutory cause of action, particularly when it comes to claims by creditors and other corporate stakeholders who do not own securities of the corporation.

This commentary examines the impact that Peoples is likely to have on claims by creditors and other stakeholders that are advanced as oppression proceedings. (The facts of the case, the many significant elements of the Supreme Court’s decision and their likely impacts on corporate governance and practice are analyzed in "Supreme Court of Canada Confirms Directors’ Fiduciary Duties Are Owed to the Corporation".)

In the context of a challenge to the conduct of directors, the oppression remedy provision of the Canada Business Corporations Act (CBCA) empowers a court to grant a broad range of remedies if the powers of the directors of the corporation are or have been exercised in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, any security holder, creditor, director or officer.

However, pursuant to the CBCA, and a number of other provincial corporate statutes, creditors of a corporation or other stakeholders, who are not current or former holders or beneficial owners of a security of the corporation, do not qualify as a party entitled to bring an oppression proceeding as of right. They may do so only if they are determined to be, in the discretion of the court, a "proper person to make an application." In a number of cases in the past, this has been an obstacle that creditors have not been able to surmount. In light of the Supreme Court’s decision in Peoples, creditors will likely find it easier in the future to obtain standing to bring an oppression proceeding, particularly in circumstances where the financial condition of the corporation is deteriorating.

The Supreme Court also said that the availability of the oppression remedy to creditors and other stakeholders was a significant factor undermining the need to extend to such parties the fiduciary duties owed by directors under statute¹. Although the oppression remedy is only available to creditors at the discretion of the court, the Supreme Court characterized the oppression remedy in the CBCA and the similar provisions of provincial corporate legislation as granting "the broadest rights to creditors of any common law jurisdiction."

The Supreme Court recognized that creditors’ interests become increasingly relevant as a corporation’s finances deteriorate, and this factor will be significant when courts’ consider whether to grant standing to a creditor as a "proper person" to bring an oppression remedy claim. Similar reasoning should apply to other stakeholders who seek leave to commence an oppression proceeding in light of the Supreme Court’s focus on the oppression remedy as a viable alternative, which supported its conclusion that it was unnecessary to expand the scope of the director’s statutory fiduciary duties.

The Supreme Court did not specifically address the duties owed and conduct expected of directors in the context of an oppression remedy proceeding. However, there is no doubt that the principles endorsed by the Court in its analysis of the statutory fiduciary duty and duty of care will be carried over into cases where oppression remedies are sought. The standards of performance the Court describes, and to which directors are subject, will be applicable in situations where it is alleged that the directors have acted oppressively or have unfairly prejudiced or disregarded the interests of creditors or other stakeholders.

Thus, the fact that creditor claims are advanced using the oppression remedy provisions will generally not change the nature or standard of the assessment of the directors’ conduct. The deference accorded the directors by the application of the business judgment rule will be available and the courts will consider the objectives of the directors and the manner in which they have acted to achieve those objectives, together with the reasonable expectations of the various parties.

However, in light of the importance placed by the Supreme Court on a finding in Peoples that there was no fraud or dishonesty in the directors’ attempts to deal with the issue they faced, it is worth stressing that an oppression remedy can be issued in respect of conduct of directors even though the court is satisfied that the conduct did not involve dishonesty or bad faith.

Editor’s note: David Morritt, along with Osler colleagues Sonia Bjorkquist and Allan Coleman, are authors of The Oppression Remedy, recently published by Canada Law Book.

Editor’s note: David Morritt, along with Osler colleagues Sonia Bjorkquist and Allan Coleman, are authors of The Oppression Remedy, recently published by Canada Law Book.

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.

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