Supreme Court Confirms that Directors Owe No Fiduciary Duty to Creditors

On October 29, 2004, the Supreme Court of Canada issued its decision in the case of Peoples Department Stores (Trustee of) v. Wise. In a unanimous decision, the Court confirmed the decision rendered in February 2003 by the Quebec Court of Appeal, ruling that directors are not liable to creditors for losses suffered by a company as a result of decisions made in good faith prior to bankruptcy—even when those decisions may have contributed to the demise of the company.

The original decision in the Quebec Superior Court in 1999 had stated that Canadian law should move in the direction of what it perceived the law to be in Great Britain, Australia and New Zealand, by recognizing a duty to creditors in such circumstances. The trial judge held that directors have a duty not only to the corporation, but also to creditors of the corporation, “if the [corporation] is embarking on a course of action which will inevitably in the short run render it insolvent.”

The lower Court’s decision was controversial in legal circles and the business community. While the Court of Appeal’s refusal to follow the trial judge’s suggestion that Canadian company law should “evolve” in that direction had provided some solace, the Supreme Court’s decision will certainly be welcome in the boardrooms of the country.

In its reasons for judgment, the Supreme Court discusses the duties imposed on directors by s. 122 (1) of the Canada Business Corporations Act, distinguishing between the two distinct duties established there, the statutory fiduciary duty and the duty of care.

The Supreme Court ruled out that directors have any fiduciary duty to creditors, but has nevertheless found that directors do owe them a duty of care. In reviewing the applicable standards of care, the Court emphasized the “business judgment rule,” reaffirming that “courts are ill-suited and should be reluctant to second guess the application of business expertise to the considerations that are involved in corporate decision making.”

The amount of the claim in first instance was some $31.5 million and the trial judge had maintained the trustee’s claim for $4.4 million.

In the Supreme Court, the trustee was represented by Gerald Kandestin, Gordon Kugler and Gordon Levine of Kugler Kandestin LLP. The directors, Lionel, Ralph and Harold Wise, were represented by Éric Lalanne and Martin Tétreault of De Grandpré Chait. The liability insurer of the directors, Chubb Insurance Company of Canada, was represented by Ian Rose and Odette Jobin-Laberge of Lavery, de Billy LLP.