CEF/DIL: Director and Officer Liability

As the CCAA process is winding up you can be confident that regulatory agencies such as the Alberta Securities Commission and British Columbia Securities Commission will be weighing in about the who / what / when / where / why of all that took place, identifying who to hold legally responsible, and arguing in court what the consequences should be.

Some of the questions that’ll need to be answered is how the Directors and Executive Committee members conducted themselves and what the law has to say about it. Back in December 2015 when this topic came up on the CEF Investors Forum I did some research and posted what I found here. Now I’m posting the same material here for whatever edification or fright the readership may derive from it. I say fright because some of what I discovered matches line for line with what the CEF / DIL BOD and Executive Committees did.

As always, if you want / need a competent legal opinion on this or any other subject – please retain counsel with expertise in this area.


ANO: A question was raised in another thread about D&O insurance, which motivated me to do some checking around, and I found some interesting articles on Director Liability as well as D&O insurance. Not being a lawyer or insurance expert, I’ll cite some experts that are. I’ve copied some section I thought were more pertinent, and added some commentary for the current context.


Chapter 3: Liability of Directors
Primer for directors of not-for-profit corporations (Rights, Duties and Practices)
www.ic.gc.ca/eic/site/cilp-pdci.nsf/eng/cl00693.html

Liability for breach of trust when dealing with charitable property
Because their duties are akin to those of trustees, directors of charitable corporations may be held personally liable for breach of trust if they mismanage charitable assets. This means they can be personally responsible for the full amount of any loss to the charitable assets.

Breach of trust involving investment decisions
Directors of charitable corporations face considerable liability risks from the improper investment of charitable funds.

Liability of directors in this regard may arise as a result of their failure:

  • to determine and comply with the investment power in the letters patent or special act creating the charitable corporation;
  • to determine and comply with specific investment powers contained in agreements accompanying a gift, such as a last will and testament of a donor in making a testamentary gift or a gift agreement by a donor in giving a perpetual endowment;
  • to determine and comply with the applicable statutory investment power that applies in a particular province in relation to investments made in that province, typically found in provincial trust legislation;
  • to invest in accordance with the standards of a prudent investor where the provisions of the trust legislation apply, including any mandatory investment criteria required by the Act;
  • to develop and implement an investment plan as required by applicable trust legislation; and,
  • to undertake investment decision making them-selves, or in provinces that permit delegation of investment decision making, such as Ontario, to ensure that an appropriate agency agreement is in place appointing a qualified investment manager and that there is careful selection and monitoring of the investment manager chosen.

Liability risks to directors arising from investment of charitable property can be significant, as well as hard to protect against. Liability can range from losses arising from bad investments to liability for missed investment opportunities from overly conservative investment decisions.

Example
In the face of an economic recession – i.e. two consecutive quarters of negative economic growth in the national economy – failure of trustees to review their investment portfolio could be considered to be putting the charitable assets unduly at risk. It is important to note, however, that this entails a two-part requirement: the directors are obligated both to look at whether the portfolio should change and to take a decision about what changes, if any, to make.

Breach of special purpose charitable trust involving donors
Directors may be held liable for breach of trust if they fail to apply funds in accordance with donors’ restrictions or if they redirect funds given for one purpose, for example, a building fund, and use them for another purpose, for instance, to pay for general operating expenses. Breach of trust may also occur if there is a failure to hold and invest the capital of an endowment fund in perpetuity, unless the donor has authorized that encroachments can be made upon the capital of such a fund.


ANO: When CEF was paying POP’s operating shortfall – would that be redirecting funds given for a purpose?  This may also mean that when the Chair said District could remain solvent by having CEF do a fundraising campaign, what he was advocating may’ve been as illegal as it was immoral and unethical.


Liability for lack of corporate authority
Directors acting outside the scope of their authority as defined by the letters patent, supplementary letters patent, or other governing documents of the corporation are personally responsible for any decisions or actions they take. This liability may arise owing to statutes, contracts, torts or the common law. Effectively, the directors are considered to have taken the decision(s) or action(s) as individuals rather than as a corporate body, so the ‘corporate shield’ does not apply.


ANO: If your “business” is to do X, and the Directors tell it to do Y, I expect that means they’re acting on their own authority and are not protected by the corporate shield.


To whom does liability apply?
Most of the legislation imposing liability on directors does not actually define who is a ‘director.’ Individuals who are acting in the capacity of directors – de facto directors – but who may not have actually been elected as such may nonetheless be exposed to directors’ liability. This could include those serving as de facto directors, ex-officio directors, those dubbed ‘honorary’ directors and those sitting on an executive committee or otherwise acting as part of a group managing the corporation’s affairs, no matter what it is called. If these individuals act like directors, they can attract the liability of directors.


ANO: I expect this means that the Executive Committee’s actions made them de-facto Directors. This’ll be a particularly important distinction for the later years if the EC was telling the Board that POP was being taken care of when it wasn’t.


Reporting requirements
Failure to file the required information with Industry Canada can lead to personal liability for directors. There is no limitation or possible defence for a director who permits or acquiesces in permitting a breach to occur. The relevant provisions are as follows:

Section 133 creates an obligation on corporations to file an annual summary on or before June 1st in each year containing information effective as of the immediately preceding March 31st. The information required in the annual summary is listed in subsection 133(1) and the form must be signed by a director or officer of the corporation. Section 133(3) provides that a corporation that defaults in filing an annual summary is guilty of an offence and is liable on summary conviction to a fine of not less than twenty dollars and not more than one hundred dollars for each day that the default continues and every director or officer who “…knowingly authorized, permitted or acquiesced in any such default is guilty of an offence and is liable on summary conviction to a like fine.”

Subsection 150(2) provides in part that if all or some of the directors are aware of the corporation’s default or failure to comply with the provisions of Section
133 (filing of annual returns), a court may hold the directors personally liable for costs incurred in the winding-up of the corporation pursuant to a court order under the Winding-Up and Restructuring Act.

Section 114.2(5) of the Canada Corporations Act provides that if a corporation or officer is required to file any report, return, bylaw or other document with Industry Canada and the corporation or officer defaults in its filing, the Minister may require the corporation or officer to make a report upon any subject connected with its default and any director or officer who knowingly authorizes or permits a default in providing such report is guilty of an offence and may be liable for a penalty of up to $50 per day while such default continues.


ANO: One of the recurring issues was lack of financials from the “arms-length” organizations District setup to operate POP.


​3 Basic Duties (of Directors)
Directors and officers have a duty to exercise due diligence in overseeing the management of the organization that they serve.

This involves 3 basic duties:Duty of Diligence (Duty of Care): Act reasonably, in good faith and in the organization’s best interest.

Duty of Loyalty: Place the interest of the organization before your own.

Duty of Obedience: Act within the scope of applicable bylaws.

Liability on winding-up
The Canada Corporations Act imposes liability on directors where, upon the application of the Attorney-General of Canada to a court, the corporation is wound up and dissolved under the federal Winding-up and Restructuring Act. Footnote 12 A corporation may be wound up in this manner under section 5.6 of the Canada Corporations Act if the corporation has been operating outside of its letters patent (either outside of its corporate objects or powers). Upon an application to the court for an order winding up the corporation, the court may determine whether the costs of the winding up shall be borne by the corporation or personally by the directors who participated or acquiesced in the offence.


Considering Accepting a Directorship? Also Consider Your Liability . . . ​
www.ibc.ca/on/business/risk-management/directors-and-officers-liability

In addition to basic duties, a director or officer may be held liable for:

Failure to act as stated under a statute. 
For example, if a statute requires directors to file a report or maintain certain records, and these reports or records are not maintained, the director may be liable for an offence under that statute.

Non-compliance of the organization with a statute.
For example, directors may be liable for financial losses, wrongful dismissal, employee discrimination or failure to remediate environmental damage.

Be aware that directors can be held personally liable and that:

  • ​​Ignorance is not a defense.
  • Resignation is not necessarily a defense.
  • Company indemnity may not be enough.

Directors and Officers Liability – Risk Management
www.ibc.ca/on/business/risk-management/directors-and-officers-liability/risk-management

​​​​​​​Directors and officers must ensure they have the appropriate information required to perform their duties effectively. Whether your board of directors is new, established, confronting a scandal, or establishing or amending its by-laws , you can help to manage organizational risk.​

Directors and Officers Liability – Claims Management
www.ibc.ca/on/business/risk-management/directors-and-officers-liability/claims-management


ANO: In my mind, given how long this was going on and the sheer magnitude of the behavior, one might make a case that the D&O insurance may be either void or deemed not applicable due to the behavior on the part of the people in charge. If that’s the case, then people might be personally sued, have to mount their own legal defense, and, as one BOD meeting posited, some of them may lose their house and all other assets as a result.

If the District lawyers gave bad advice, they too might be up for a seat in the spotlight as well.

We’ll have to see what the courts have to say about all this.

7 thoughts on “CEF/DIL: Director and Officer Liability

Add yours

  1. You appear seriously misinformed regarding CCAA and Securities Commision investigations. As per the original court order placing ABC District in CCAA protection (s. 20(b)) and s. 11.1(2) of the CCAA, creditor protection did not bar a regulator from conducting an investigation. If ASC were to conduct an investigation they had two (2) years from the date they first became aware of the matter at hand to initiate administrative or criminal proceedings as per the Alberta Limitations Act. Also, the Canada Corporations Act applies to corporations registered with the Government of Canada. ABC District is registered with the Alberta Government and subject to provisions of the Alberta Corporations Act. Bottom line is CCAA protection did not bar an ASC investigation and the two year period for initiating proceedings has lapsed.

    Like

    1. I found example of limitations pertaining to civil action, but not regulatory / criminal prosecution. Here’s a link to the AB Securities Act – tell me where in this document the ASC is mandated to proceed with an enforcement action within 2 years of finding out about an offence.

      Click to access s04.pdf

      Like

      1. It’s not in the Alberta Securities Act. You might want to read the Alberta Limitations Act, Canadian Constitution (s. 11(b)) or refer to recent Supreme Court of Canada decisions that establish timelines for bringing forward prosecutions in both civil and criminal cases.

        Like

        1. I read the AB Limitations Act in addition to the on-the-ground reports from the Monitor. The Representative Actions were blocked by the courts until recently and have now been cleared to proceed so any applicable limitations statute weren’t violated there.

          With respect to the ASC / BSC – the first time something was noted as being amiss was the Monitor’s earlier reports (the 2nd I think). Since then you can bet that the Monitor has been forwarding everything they learned to the regulatory agencies. The ASC doesn’t comment on pending investigations, and given how they’ve gone after almost identical situations in other cases I find it hard to believe they’d contravene the limitations act in deciding when to move forward.

          Like

          1. ABC District reported circumstances surrounding CEF to the ASC in May 2015. The monitor plays no role in providing reports to the ASC or any other regulator … not part of their court appointed mandate. ASC has a constitutional and statutory obligation to notify parties as to whether they are under ASC investigation … do you have evidence confirming the ASC or BC Securities Commission provided legal notice of an investigation to ABC District (note – the timeline for doing so was May 2017 as per the Limitations Act).

            Like

    2. I would also note that there are two Representative Actions in process with the various Board members have been named individually in the respective suits. This action was specifically barred by the courts despite action by the “dissident group” that tried to proceed with their lawsuit earlier.

      Like

      1. At this point draft Statements Of Claim have been submitted for both CEF and DIL. These serve as placeholders to meet the two year filing requirement for civil claims. These claims remain as placeholders until such time as the Alberta Court of Queen’s Bench and/or BC Superior Court issue an order certifying the claim as a “class action”. Relatively few class actions gain certification with claims involving insolvencies being a minority. Note that the order placing ABC District into receivership under CCAA extinguished any fiduciary duty of care CEF directors owed to creditors. Having accepted compensation in the form of a convenience payment and shares in Sage, CEF holders need to wait for realization of cash value from their shares to establish the quantum of their loss before they can advance a claim.

        Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Website Powered by WordPress.com.

Up ↑

%d bloggers like this: