Two recent Ontario court decisions have clarified the basis upon which underwriters faced with litigation claims can claim indemnity compensation from insolvent issuers. The decisions weaken the strength of underwriters’ claims in certain circumstances and may have implications for underwriters in structuring indemnity provisions and in responding to civil litigation, particularly class action proceedings.


In March 2012, in response to criminal and regulatory investigations and class action proceedings alleging misrepresentations in its public filings, Sino-Forest Corporation sought protection from its creditors by entering into insolvency proceedings under the Companies’ Creditors Arrangement Act (CCAA). In response to the CCAA proceedings, Sino-Forest’s underwriters (as well as other third parties including the company’s auditors) filed CCAA claims for compensation from Sino-Forest stemming from their costs and liability in regard to the class actions filed against them.

The underwriters’ claims were based on the contractual indemnity provisions in the underwriting agreements between the underwriters and Sino-Forest. The underwriters argued that, for the purposes of the CCAA, their claims for indemnity ranked as “creditor” claims. Sino-Forest’s other creditors contested this view and argued that the underwriters’ claims were lower-ranking “equity” claims. Given that Sino-Forest’s assets were not sufficient to satisfy the claims against it, the determination of whether underwriters’ claims ranked as “creditor” or “equity” claims would likely determine whether the underwriters would be able to recover any compensation from Sino-Forest in regard to the class actions.


The Ontario Superior Court of Justice held that the indemnity claims made by the underwriters largely ranked as “equity” claims, a finding that was upheld by the Ontario Court of Appeal.

The courts reasoned that the characterization of an indemnity claim under the CCAA turns on the character or “nature” of the underlying primary claim. Since the underwriters’ indemnity claims were based on underlying class action claims brought against the underwriters by equity claimants (Sino-Forest’s shareholders), the indemnity claims made by the underwriters in response to those civil actions were found to also be properly considered as “equity” claims. As a practical result, the underwriters’ indemnities from Sino-Forest were of little or no value, since “equity” claims rank behind “creditor” claims in a CCAA proceeding.


There are several implications of the decisions. The “nature” based reasoning used by the courts suggests that not all offerings will be treated equally in terms of indemnity protection. In particular, underwriters of debt securities of issuers that become insolvent could have their indemnity claims be considered as “creditor” claims because the nature of the underlying litigation claim against the underwriter for such offerings would be based on claims by creditors, not shareholders. On the other hand, underwriters of equity securities will likely have their indemnity claims treated as “equity” claims ranking behind creditor claims. The reasoning of the decisions suggests that insofar as the “nature” of an indemnity claim can be separated from an underlying liability to shareholders, it may constitute a higher-ranking “creditor” claim. In light of the decisions, underwriters will want to be mindful that indemnity provisions they agree to are broad enough to encompass not only costs stemming from an underlying liability to shareholders, but also potentially higher-ranking “creditor” claims for other expenses, such as legal costs expended in denying a claim by shareholders.

The “nature” based classification of indemnity claims could also have implications for litigation strategy in some cases, as it could weigh in favour of completely denying liability and defending a claim (thus incurring more legal costs that are potentially “creditor” claims) to attempt to reduce or avoid a liability payout to the claimants (which would likely rank as a lower-ranked “equity” claim and attract no compensation from an insolvent issuer). Similarly, in negotiating a settlement to a class action where the issuer is insolvent and the underwriter has made indemnity claims, underwriters will want to consider the implications of any settlement on their indemnity claims.

For the full text of the decisions, please see Sino-Forest Corporation (Re), 2012 ONSC 4377 (CanLII) and Sino-Forest Corporation (Re), 2012 ONCA 816 (CanLII).