Are the directors of a corporation which has been placed into receivership entitled to retain counsel on behalf of the corporation without prior approval of the Receiver or the court?

According to a recent decision of the Ontario Court of Appeal, the answer is “Yes”.

In The City of Peterborough v. Kawartha Native Housing Society Inc., Ontario’s highest court noted that boards of directors of companies placed in receivership retain residual powers. Powers which the Receiver-Manager is not authorized to exercise by the relevant court order, or terms of private appointment, remain vested in the directors. Barring a resignation, directors remain in office and can exercise functions.

Further, whatever their residual authority may be, the board of directors continue to have an obligation to act in the best interest of the corporation. If, in their opinion, the appointment of a receiver is not in the best interest of the corporation, or if they believe that the steps being taken by the Receiver on behalf of the corporation are not in the corporation’s best interest, then they are entitled to retain counsel to bring the matter to the attention of the court. It will be for the court to decide if the board has acted responsibly and reasonably in doing so.

That said, the right to retain counsel by the board of a corporation in receivership is not unfettered. The court ruled that if, for example, a lawyer is retained for a purpose that has the effect of interfering with the receiver’s legitimate duties as an officer of the court, or the Receiver’s duties as the manager of the ongoing operation of the corporate enterprise, then the retainer is not appropriate.

The Court of Appeal decision emphasized that “there are no blank cheques”. The court will decide whether a board of directors is to be reimbursed for the legal expenses in taking a particular course of action. In exercising its discretion to make a cost award in favour of a board of a corporation in receivership, the court will consider whether the board was acting in the interest of the corporation and whether the position advanced by the board was properly advanced by the board rather than by the Receiver.

In Kawartha Native Housing, the Court of Appeal concluded that it was clear that the positions advanced by counsel for the board were properly advanced by the board rather than by the Receiver. Counsel were taking positions adverse to the Receiver and were entitled to retain and properly pay legal counsel for services rendered out of the assets of the corporation.