Today, the Supreme Court of Canada denied a group of investors leave to appeal the approval of a settlement releasing Ernst & Young LLP from any claims arising from its auditing of Sino-Forest Corporation. The settlement is part of Sino-Forest’s Plan of Compromise and Reorganization following a bankruptcy triggered by allegations of corporate fraud.

The Settlement

In 2013, Morawetz J. approved a settlement releasing Ernst & Young LLP from any claims arising from its auditing of Sino-Forest. The settlement was supported by all parties to the Companies’ Creditors Arrangement Act proceedings, including the Monitor, Sino-Forest’s major creditors and a group of plaintiffs seeking to recover their investment losses in a proposed class action.

The settlement created a fund of $117 million for distribution to the security holders of Sino-Forest and included a provision that prohibited any investor from opting out of the settlement.

The Objection

A group of Sino-Forest investors (“Invesco”) objected to the settlement because it wished to preserve its right to opt out of any class proceedings and pursue an independent claim against Ernst & Young. Invesco was represented by Kim Orr LLP and held approximately 1.6% of Sino-Forest’s outstanding shares at the time of its collapse. Perell J. had previously denied Kim Orr LLP carriage of the proposed class action in a decision that was not appealed.

Morawetz J. recognized that a class action settlement must ordinarily include an opt out provision. However, he held that the CCAA allowed the court to impose a compromise of the class action claims on Invesco since the settlement:

  1. Was approved by the requisite majority of creditors; and
  2. Was fair and reasonable.

The Ontario Court of Appeal denied leave to appeal, holding that there was no basis to interfere with Morawetz J.’s finding that the “settlement was fair and reasonable, provided substantial benefits to relevant stakeholders and was consistent with the purpose and spirit of the CCAA.”

Leave to Appeal

Now that the Supreme Court has denied leave, Morawetz J.’s decision as affirmed by the Court of Appeal remains the leading case regarding the interaction between class proceedings legislation and the CCAA. We continue to follow developments in this area of the law with interest.