SCC clarifies oppression remedy

Supreme Court upholds <i>Budd v. Gentra</i> in defining remedy in directors’ personal liability cases
SCC clarifies oppression remedy
THE SUPREME COURT of Canada has clarified and confirmed the principles of the oppression remedy in a Quebec case that pitted a onetime company president against current directors after the former saw the value of his shares reduced.

 In dismissing the appeal from corporate directors in Andrus Wilson v. Ramzi Mahmoud Alharayeri, the Supreme Court recognized a near-20-year-old Ontario appellate court decision as good law, and upheld the broad wording of the oppression remedy in the Canada Business Corporations Act.

“I think the court reaffirmed the idea that … the oppression remedy is a broad remedy, [meant to be] applied flexibly by a trial judge, taking into account the particular circumstances of any case,” said Douglas Mitchell of Irving Mitchell Kalichman LLP in Montreal, who was lead counsel for the respondent.

The respondent had been president and CEO of Wi2Wi Corporation before resigning his positions over non-disclosure and conflict-of-interest issues during an attempted corporate merger. The appellant, a member of Wi2Wi’s board, then became its new president and CEO.

Later the board decided to issue a private placement of convertible secured notes to its existing common shareholders, but in such a manner that intentionally prevented the respondent from participating in it. The value and proportion of his shares in the corporation were accordingly reduced substantially, and he filed an application under s. 241  of the Canada Business Corporations Act for oppression against four Wi2Wi directors, including the appellant.

The trial judge held the appellant and another director solidarily liable for the oppression and ordered them to pay compensation to the respondent. In dismissing the appeal, Quebec’s Court of Appeal held that the imposition of personal liability was justified.

“Section 241(3) [the oppression remedy] of the Canada Business Corporations Act  gives a trial court broad discretion to ‘make any interim or final order it thinks fit,’ ” Justice Suzanne Côté wrote. “[T]he Act’s wording goes no further to specify when it is fit to hold directors personally liable under this section. As stated in the leading decision, Budd v. Gentra Inc. (1998), 43 B.L.R. (2d) 27 (Ont. C.A.), determining the personal liability of director requires a two‑pronged approach. First, the oppressive conduct must be properly attributable to the director because of his or her implication in the oppression. Second, the imposition of personal liability must be fit in all the circumstances.”

At least four general principles should guide courts in fashioning a fit remedy under s. 241(3) of the CBCA, Justice Côté wrote. “First, the oppression remedy request must in itself be a fair way of dealing with the situation. … Second, any order should go no further than necessary to rectify the oppression. Third, any order may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders. And fourth, a court should consider the general corporate law context in exercising its remedial discretion.”

Terrence O’Sullivan, of Lax O’Sullivan Lisus Gottlieb LLP in Toronto, represented the appellant. “What we sought to do was have [the Supreme Court] introduce a more objective test” than what existed in Budd v. Gentra, which was a pleadings case that relied on the subjectivity of the trial judge in determining whether the oppression remedy was appropriate in dealing with a corporate director, he said. 

“The Supreme Court … opted instead for an expanded subjective test, set out in their four general principles,” O’Sullivan says. Consequently, “it is only marginally clearer than it was before what conduct will attract personal liability for directors.”

Mitchell had argued that a court ordering  a remedy as it saw fit was consistent with the wording of the CBCA statute and its oppression remedy.
“I think the appellants ... tried to establish a test, … a series of factors that must be present in all cases before you can determine that directors should be liable,” Mitchell says. 

"Ultimately, the Supreme Court said that position is inconsistent with the purpose of this statute.”