In the recent case of Peterborough (City) v. Kawartha Native Housing Society, the Ontario Court of Appeal was asked to determine:

  1. whether directors of a corporation in receivership are entitled to retain counsel on behalf of the corporation without prior approval of the receiver or the court; and
  2. whether the reasonable costs of retaining counsel in a receivership can be paid out of the assets of the corporation.

By way of background, Otonabee Native Homes Inc. and Kawartha Native Housing Society Inc. are non-profit housing corporations (collectively, the “Corporations”) operating affordable housing units for the Aboriginal community in Peterborough (the “City”). The Corporations were subject to operating agreements administered and funded by the Ministry of Municipal Affairs (the “Ministry”) and the City at different times.

The Ministry brought an action for a declaration that the Corporations were in breach of the operating agreements and sought an order for the appointment of a receiver. The board of directors of each Corporation (collectively, the “Boards”) retained counsel to defend the action and oppose the receiver’s appointment. A receiver was eventually appointed and, in the course of the receivership proceedings, the motions judge ordered the receiver to pay $32,130.64 from the Corporations’ funds for counsel retained by the Boards during the receivership period.

The City appealed the costs order, and the Divisional Court returned the matter to the motions judge to be heard again. On the re-argued motion, the Boards sought additional costs, not only for legal expenses incurred in the course of the receivership litigation, but also for legal expenses with respect to general corporate advice received during the receivership period. The motions judge held that the Boards did not have the legal right to retain counsel after the receivership order without leave of the court. Still, the motions judge awarded $15,000 for counsel’s costs with respect to the receivership litigation on an equitable basis.

The Boards appealed the judge’s decision, and the Court of Appeal allowed the appeal in part. Three reasons justified the Court of Appeal’s decision. First, the Court restated the fundamental importance of the right to retain counsel to the administration of justice, both with respect to matters of efficiency and fairness. Second, the Court held that there was nothing in the operating agreements of the Corporations or in the receivership order that prohibited the Boards from retaining counsel. While the powers provided to a receiver displace the same powers ordinarily held by a board of directors, directors retain residual authority, and any power outside the scope of the receivership order remains vested in the directors. Third, in the course of a receivership, directors remain obligated to act in the best interests of the corporation. As a result, the Boards were entitled to retain counsel to challenge the appointment of the receiver, or any steps taken by the receiver, if they believed that such actions were not in the best interests of the Corporations.

The Court concluded that while it remains for a court to determine whether directors have acted reasonably in retaining counsel in determining a cost award, directors of a corporation in receivership are entitled to retain counsel on behalf of the corporation without prior approval of the receiver or the court. The Court did caution that such counsel cannot interfere with a receiver’s legitimate duties. However, in this case, neither the City nor the receiver had objected to the Boards’ retention of counsel and the motions judge had determined that the Boards’ actions were not without merit.

With respect to the award of costs, the Court of Appeal was very clear that the decision to retain counsel does not amount to the corporation issuing a blank cheque. The Court enumerated the following non-exhaustive list of factors to consider in addition to the factors set out in Rule 57 of the Rules of Civil Procedure: (i) whether the position advanced by counsel for the board has any merit; (ii) whether the board is acting in the interest of the corporation; (iii) whether the position advanced by the board is properly advanced by the board rather than by the receiver; and (iv) whether the position advanced by the board detracts from the orderly administration of the receivership.

All four factors supported the retention of counsel in the course of the receivership litigation. The Court thus reinstated the original decision and the quantum the motions judge ordered be paid to counsel from the funds of the Corporations.

With respect to the costs relating to general corporate advice provided during the receivership, the Court was of a different view. With reference to the reality of the receivership, the Court held that any general advice relating to restructuring the Corporations should have been done in conjunction with the receiver and with the approval of the Court. There was simply no reasonable basis for not seeking such cooperation or approval and, as a result, costs were denied.