While Supreme Court of Canada judgments dealing with commercial law are scarce, in Wilson v. Alharayeri, Canada’s highest Court unanimously held that directors, as opposed to the corporation, itself can be held personally liable for corporate oppression.
The Supreme Court affirmed the Quebec Court of Appeal judgment holding two directors personally liable for the payment of $648,310 representing damages sustained by the respondent, Mr. Alharayeri, a shareholder whose stake was diluted given the non-conversion of his shares by the board.
The Supreme Court declined to limit a director’s personal liability to the traditional principles at common law, namely bad faith and using the corporation to advance personal interest, thereby recognizing the possibility of director liability for oppression in the absence of bad faith or decisions motivated by personal interest.
The Supreme Court confirmed the two-pronged approach set out in the Ontario Court of Appeal case Budd v. Gentra Inc. for the determination of director liability. The first prong requires that the oppressive conduct be properly attributable to the director because he or she is implicated in the oppression. In other words, the director must have exercised or failed to have exercised his or her powers so as to effect the oppressive conduct. The second prong requires that the imposition of personal liability be a fit remedy in all the circumstances.
In light of the fact that “fitness” is necessarily an undefined concept, the Supreme Court distilled four general principles that should guide the Courts in fashioning an order in oppression under Section 241 of the Canada Business Corporations Act (“CBCA”):
- The oppression remedy request must in itself be a fair way of dealing with the situation;
- The order should go no further than necessary to rectify the oppression;
- The order may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders; and
- The court should consider the general corporate law context in exercising its remedial discretion under Section 241 of the CBCA, meaning that director liability cannot be a surrogate for other forms of statutory or common law remedies, particularly where such other relief may be more fitting under the circumstances.
In assessing fairness, the Court relies on a doctrine which states that it is fair to hold a director personally liable where the director derived personal benefit from his actions, breached director duties or misused corporate power. The Court must also determine whether an order against the corporation would be a fair remedy. The Court stressed that this list of scenarios is not exhaustive and that neither personal benefit nor bad faith is necessary to engage directors’ liability. While the appropriateness of an order under Section 241 turns on equitable considerations, the Court stated “that personal benefit and bad faith remain hallmarks of conduct properly attracting personal liability, and although the possibility of personal liability in the absence of both of these elements is not foreclosed, one of them will typically be present in cases in which it is fair and fit to hold a director personally liable for oppressive corporate conduct”.
The key takeaway from this judgment is that Canada’s highest Court broadens the scope of situations where directors’ liability may be triggered and refuses to limit director liability to situations of bad faith and decisions motivated by personal interest. Further, the principles set out by the Court are subject to the interpretation of the first instance judge, creating an increased risk of liability for directors and officers.