Briere Sound Ltd. v. Briere, 2014 BCSC 417 (CanLII), decided March 17, 2014

To the best of the knowledge of the judge, this was a first for British Columbia: a finding that a creditor was an “appropriate person” to conduct a derivative action under the B.C. Business Corporations Act (BCBCA). The ruling comes with some caveats, including that a creditor-initiated derivative action is more likely to be approved where (as in this case) the company is insolvent. These nuances are discussed in more detail after the following quick review of the facts and history of the litigation.

Facts

Reis had acquired a 50% interest in BSL, a small audio-visual services company. The remaining 50% was owned by BSL’s founder. In addition to being a shareholder and director, Reis was also a creditor, by virtue of a $250,000 shareholder loan. Subsequent infighting between Reis and the founder prompted Reis to bring an oppression action. Around the same time, he obtained a court order requiring the repayment of $150,000 owing under the shareholder loan. All of this gave BSL’s bankers the jitters, resulting in the acceleration of the company’s bank loans. Before long, a receiver was on the scene. The founder (through a company nominally controlled by a relative) seized the opportunity to regain control of the business by buying back its assets from the receiver and continuing what appeared to be essentially the same business under a new corporate structure.

Reis considered certain aspects of the founder’s conduct in buying the assets to have been inconsistent with his duties to BSL (the reader is referred to the reasons for a full description of what is alleged to have happened). In 2006, he applied to bring a derivative action. Approval of a derivative action generally requires that the action be in the interest of the company, that the complainant be acting in good faith, that certain notice provisions have been met and that the company itself has refused to initiate the action in its own right. Not just anyone can be a complainant in a derivative action, however. Under the BCBCAthis status is expressly conferred on only two categories of persons – shareholders and directors – although the Act gives the courts the discretion to authorize other “appropriate persons” to conduct derivative actions. Back in 2006, Reis passed the “complainant” test (since he was both a director and a shareholder), so the derivative action was allowed to proceed under his control.

The plot twist

The plot twist was that, after he obtained court approval for the derivative action, Reis settled his oppression claim (which had to do with how he had been treated by the founder) and, as part of the settlement, ceased to be a shareholder and director of BSL. The founder took that as his cue to head back to the B.C. Supreme Court and ask that Reis – who no longer fell into either of the two express categories of “complainant” recognized by the BCBCA – be removed from the conduct of the derivative action. That is the application we are discussing here. (Note that it was not completely clear that the founder actually had standing to bring such a “disqualification application”, but the court seems to have been content to proceed on an “inherent jurisdiction” basis without deciding that issue.)

Can a creditor conduct a derivative action under the BCBCA?

The Court’s ruling on this application focused largely on whether Reis could conduct a derivative action solely in the capacity of creditor. That Reis had to resort to his status as creditor is a result of a peculiarity of the BCBCA. The derivative action provisions of other similar Canadian statutes – e.g. the CBCA and the BCAs of AlbertaOntario and Quebec – expressly include former directors and shareholders as “appropriate” or “proper” persons (Alberta’s BCA expressly includes creditors as well). Counsel for the founder argued that, under the interpretive principle of in pari materia, the unique omission of former directors and former shareholders from the BCBCA provision should be interpreted as a deliberate exclusion of all such persons. While the Court did not expressly reject this rather formalistic argument, it largely ignored it, preferring to focus primarily on the more substantive issue of whether, as a creditor and under these circumstances, Reis was an “appropriate person”.

The oldest case considered by the Court, Re Daon Development Corp.a 1984 B.C. Supreme Court decision, limited the concept of “proper person” to those with a “direct financial interest in how the company is being managed.” Subsequent decisions in B.C. and elsewhere have relaxed that requirement, e.g. Discovery Enterprises Inc. v. Ebco Industries Ltd., a 1998 ruling in which the B.C. Court of Appeal held that “an indirect interest in the integrity, prosperity and continued existence of the company” would suffice. Further strengthening Reis’ case were three other considerations that applied in his specific situation:

  • BSL was insolvent: in Peoples Department Stores, the Supreme Court of Canada suggested that creditors of insolvent or near insolvent companies would more easily qualify as “appropriate persons” for the purposes of proposed derivative actions;
  • Reis held half of the company’s outstanding debt, in consequence of which his interests aligned closely with those of the company; and
  • The act or conduct complained of constituted (allegedly) the use of the company as a vehicle for committing a fraud upon the applicant. The Alberta Court of Queen’s Bench in its 1988 ruling in First Edmonton Place v. 315888 Alberta Ltd. found this to be a relevant factor and the B. C. court in Briere also considered it a relevant factor.

The Court was therefore prepared to permit Reis to continue the derivative action in his capacity as a “creditor” of the company. Importantly, the Court noted that, to qualify as a complainant, a creditor must be more than a “bare creditor” – there being no appetite at the judicial level to “turn all actions for debt into derivative actions”. But to be “more than a bare creditor” for this purpose does not require a direct financial interest, as may have been the case in the days of Daon. Instead, the ruling suggests four circumstances that can help to raise a creditor above “bare creditor” status (in addition to the general principle identified inDiscovery Enterprises, as noted above):

  • That the creditor had been a director and/or shareholder at the time of the conduct complained of;
  • That the company is insolvent;
  • That the creditor is a major creditor (in this case, fully half of the company’s debt was owed to Reis personally); and
  • That the acts complained of (if proven) directly and negatively affected the creditor’s interest in the company, particularly if this was intentional.

Thus, with the “caveats” that some or all of these conditions (or other conditions that similarly serve to elevate a creditor’s relationship with the company above that of a mere “bare creditor”) must be met, the case may offer additional support to the argument that creditors are not automatically excluded from the conduct of derivative actions simply because the BCBCA (or, potentially, another similar statute) does not expressly identify them as “appropriate” or “proper” parties.