Photo of Mohamed AmeryBy Mohamed AmeryOctober 07 2019
Litigation

Creditors and the Oppression Remedy

We have written a series of articles about the oppression remedy and its application to the shareholders of a corporation. See “Business Judgment and the Fair Treatment of Shareholders” (July 2016), “A Brief Overview of the Oppression Remedy” (April 2017), “Director Liability in Oppression Actions” (August 2017), “Liquidation and Dissolution of a Corporation as a Remedy for an Aggrieved Shareholder” (February 2018). This article discusses the application of the oppression remedy to the creditors of a corporation.

Introduction

Historically, the oppression remedy was limited to shareholders. However, both the federal Canada Business Corporations Act and the provincial Business Corporations Acts confer courts with the power to allow a creditor’s oppression application where the court finds that the creditor is the “proper person” to make the application.

In this article, we examine court decisions on oppression claims involving creditors, and attempt to identify fact scenarios that would be favourable to a creditor’s claim for oppression.

The Oppression Remedy for Creditors

At its core, the oppression remedy seeks to protect the economic interests of shareholders (especially minority shareholders) and creditors from oppressive conduct by a corporation. As explained by the Supreme Court of Canada in the seminal BCE v 1976 Debentureholders case, “oppressive conduct” is described as being coercive, abusive, done in bad faith, or “burdensome, harsh and wrongful, a visible departure from standard of fair dealing”.

A creditor must demonstrate the following to successfully prosecute the oppression remedy:

  1. The creditor had a “reasonable expectation” to be treated in a particular way by the corporation,
  2. The corporation or its directors breached the creditor’s reasonable expectations through its conduct, and
  3. The conduct rose to the level of “oppression”.

Further, as made clear by the Ontario Court of Appeal in Downtown Eatery (1993) Ltd. v Ontario, the oppressive conduct causing harm need not be undertaken with the intent of harming the shareholder or creditor (para 56).

Assurances made to unsecured creditors for equal treatment

In the recent case of Mudrick Capital Management LP v Wright, 2019 ABQB 662, the Plaintiffs were unsecured creditors of the corporation. The corporation experienced financial difficulties and began to restructure its debt. As part of the restructuring, the corporation entered into a transaction with other unsecured creditors to exchange their unsecured notes for secured notes. When rumours of debt restructuring spread, the prices of unsecured notes began to drop.

The corporation did not include the Plaintiffs in this transaction, despite assurances from the corporation’s Director/CEO, Mr. Wright, that the Plaintiffs would be included in any exchange of unsecured debt for secured debt. The Plaintiffs claimed oppression against the corporation’s directors on the basis that their expectation to be treated equally with other unsecured noteholders was defeated by the directors’ actions.

The Court found that based on Mr. Wright’s assurances, the Plaintiffs had a reasonable expectation to be included in any transaction involving an exchange of unsecured debt for secured debt (para 87). However, the Court found that aside from Mr. Wright, the other directors’ conduct did not rise to the level of oppression since they were exercising their business judgment and were acting in the best interests of the corporation. As a result, the Court dismissed claims against the other directors, but indicated that Mr. Wright could potentially be personally liable for oppression at trial (paras 112 and 129). This matter has not yet proceeded to trial as of October 2019.

Stripping assets from a corporation

In Prime Computer of Canada v Jeffrey, [1991] OJ No 2317, the Plaintiff sold computer components to the corporate respondent, of which the individual respondent was a director. While being indebted to the applicant for over $100,000, the corporation increased its salary payments to the individual respondent. The applicant sought relief for the outstanding amounts under the oppression remedy.

According to the Court, the salary increase was an attempt by the director to strip the company of cash so that no assets would remain to pay the applicant. The Court found that the corporation’s actions were oppressive or unfairly prejudicial to the interests of the creditor and granted the applicant’s claim for oppression (para 8). Since the chances of recovery against the financially compromised corporation were low, the Court ordered the individual director to personally pay the amounts owing to the applicant.

In Royal Bank v Amatilla Holdings Ltd., [1994] OJ No. 198, the applicant was owed approximately 2 million dollars by the corporation. At the time the corporation had the debt owing, the respondent, the sole director of the corporation, declared and paid a dividend to shareholders.

The Court found that the respondent was aware of the debt owing to the applicant and was aware that a payment of the dividend would result in the corporation not being able to pay its debt. As a result, the respondent exercised her powers as a director in a manner that was oppressive, unfairly prejudicial and unfairly disregarded the interests of the applicant (para 3). The Court ordered that the dividend payment be set aside and ordered the respondent to collect the dividends from the shareholders.

Conclusion

The outcome of a creditor’s oppression claim turns on the specific facts of a case, since courts look to the facts to determine a creditor’s “reasonable expectations”. Thus, when considering a potential oppression claim, a creditor must assess what expectations they had based on the actions and representations of a corporation (or its directors), and whether the corporation (or its directors) adequately considered the creditor’s expectations in making their decisions.

I would like to thank Anuj Baxi for his assistance in writing this article.

Invitation for Discussion:

If you would like to discuss this blog in greater detail, or any other business litigation matter, please do not hesitate to contact Mohamed Amery.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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