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 securities.
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 CFO.
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 CPAO.”
The class action settlement therefore did not affect the right of the CPAO to bring, continue or prosecute allegations against the CFO.
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.