The Ontario Superior Court has ruled
that claims for professional misconduct can still be brought
against directors and officers despite a class action settlement
and release regarding the same situation. The settlement was part
of Sino-Forest's Plan of Compromise and Reorganization
following a bankruptcy triggered by allegations of corporate fraud.
This decision highlights the complexities of concurrent class action and regulatory
proceedings, especially in the context of the CCAA.
A securities class action against Sino-Forest Corporation, its
senior officers and directors, and others was commenced in July
2011 after Sino-Forest filed for CCAA protection. In July 2014, the
Ontario Superior Court approved a settlement with a former CFO of
the company, which required payment of $5.6 million for the benefit
of Sino-Forest's stakeholders and provided a release under the
auspices of the CCAA. The notice for the class action settlement
was directed to all persons who acquired Sino-Forest
In June 2014, before the class action settlement was approved,
the CFO negotiated a separate settlement with the Ontario
Securities Commission. The OSC settlement required him to make
admissions regarding allegations that he failed to exercise the
skill, care and diligence required of him as CFO. At this point,
the CFO's counsel wrote to the Chartered Professional
Accountants of Ontario (CPAO) regarding the OSC settlement to
determine whether the CPAO would bring proceedings against the CFO.
Counsel did not mention the proposed class action settlement to the
CPAO at this time.
The Disciplinary Proceeding
In June 2015, after many months of discussions with the CPAO,
CFO's counsel for the first time informed the CPAO that it was
barred from commencing disciplinary proceedings against the CFO by
the class action settlement order. The CPAO nevertheless commenced
regulatory proceedings alleging that the CFO breached the Rules of
Professional Conduct established by the Institute of Chartered
Accountants of Ontario, including by failing to perform his
professional services with due care while he was CFO of
Sino-Forest. The CPAO is seeking a $75,000 fine and a two year
suspension from the practice of accounting.
Motion to Halt the Disciplinary Proceedings
The CFO brought a motion before the Ontario Superior Court for
an order declaring that the CPAO's allegations were released
and discharged pursuant to the class action settlement order and
that it was enjoined from bringing the disciplinary proceeding.
Justice Morawetz refused to grant this order. He found
that the CPAO's claim of professional misconduct against the
CFO did not give rise to any financial claim against Sino-Forest or
its officers and directors, in their capacities as such, and was
therefore not able to be compromised under the CCAA. The CPAO
allegations were with respect to the CFO's professional conduct
as a chartered accountant, independent of his role as a director or
Moreover, Justice Morawetz found that the CFO "never
intended or understood that the regulatory powers of CPAO would be
barred by the settlements of the CCAA or the class
proceedings." If the CFO wanted the release to be effective as
against CPAO, "steps could have been taken to serve
The class action settlement therefore did not affect the right
of the CPAO to bring, continue or prosecute allegations against the
Implications for Directors and Officers
This decision indicates that professional misconduct proceedings
brought against directors and officers may be commenced following
settlements in other matters unless specifically released. It also
underscores the importance of giving notice of a settlement to all
parties intended to be bound in order to ensure an enforceable full
and final release.
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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