Peoples Department Stores Inc. (Trustee of) v. Wise

Peoples Department Stores Inc. (Trustee of) v. Wise
Collection
Supreme Court Judgments
Date
2004-10-29
Neutral citation
2004 SCC 68
Report
[2004] 3 SCR 461
Case number
29682
Judges
Iacobucci, Frank; Major, John C.; Bastarache, Michel; Binnie, William Ian Corneil; LeBel, Louis; Deschamps, Marie; Fish, Morris J.
On appeal from
Quebec
Subjects
Bankruptcy and insolvency
Commercial law
Notes
SCC Case Information: 29682
Decision Content
Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, 2004 SCC 68
IN THE MATTER OF the Bankruptcy of Peoples Department Stores Inc./Magasins à rayons Peoples inc.
Caron Bélanger Ernst & Young Inc., in its capacity as Trustee
to the bankruptcy of Peoples Department Stores Inc./
Magasins à rayons Peoples inc. Appellant
v.
Lionel Wise, Ralph Wise and Harold Wise Respondents
and
Chubb Insurance Company of Canada Respondent
Indexed as: Peoples Department Stores Inc. (Trustee of) v. Wise
Neutral citation: 2004 SCC 68.
File No.: 29682.
2004: May 11; 2004: October 29.
Present: Iacobucci,* Major, Bastarache, Binnie, LeBel, Deschamps and Fish JJ.
on appeal from the court of appeal for quebec
Corporations — Directors and officers — Fiduciary duty and duty of care — Directors of bankrupt corporation being sued by trustee — Trustee claiming that directors breached fiduciary duty and duty of care — Whether directors owe fiduciary duty or duty of care to corporation’s creditors — Canada Business Corporations Act, R.S.C. 1985, c. C‑44, s. 122(1) .
Bankruptcy and insolvability — Reviewable transactions — Transfer of assets between wholly-owned subsidiary and parent corporation — Wholly-owned subsidiary and parent corporation declaring bankruptcy — Parent corporation’s directors sued by trustee of wholly-owned subsidiary — Trustee claiming that certain transactions were reviewable — Whether consideration for impugned transactions conspicuously less than fair market value — Whether directors “privy” to transactions — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3, s. 100 .
Wise Stores Inc. (“Wise”) acquired Peoples Department Stores Inc. (“Peoples”) from Marks and Spencer Canada Inc. (“M & S”). L.W., R.W. and H.W. (the “Wise brothers”) were majority shareholders, officers and directors of Wise, and the only directors of Peoples. Because of covenants imposed by M & S, Peoples could not be merged with Wise until the purchase price had been paid. Almost from the outset, the joint operation of Wise and Peoples did not function smoothly. Parallel bookkeeping, combined with shared warehousing arrangements, caused serious problems for both companies. As a result, their inventory records were increasingly incorrect. The situation, already unsustainable, was worsening. L.W. consulted the vice-president of administration and finance of both Wise and Peoples in an attempt to find a solution. On his recommendation, the Wise brothers agreed to implement a joint inventory procurement policy whereby the two firms would divide responsibility for purchasing. Peoples would make all purchases from North American suppliers and Wise would, in turn, make all purchases from overseas suppliers. Peoples would then transfer to Wise what it had purchased for Wise, charging Wise accordingly, and vice versa. The new policy was implemented on February 1, 1994. Before the end of the year, both Wise and Peoples declared bankruptcy. Peoples’ trustee filed a petition against the Wise brothers. The trustee claimed that they had favoured the interests of Wise over Peoples to the detriment of Peoples’ creditors, in breach of their duties as directors under s. 122(1) of the Canada Business Corporations Act (“CBCA ”). In the alternative, the trustee claimed that the Wise brothers had in the year preceding the bankruptcy been privy to transactions in which Peoples’ assets had been transferred to Wise for conspicuously less than fair market value within the meaning of s. 100 of the Bankruptcy and Insolvency Act (“BIA ”). The trial judge found the Wise brothers liable on both grounds. The Court of Appeal set aside the trial judge’s decision.
Held: The appeal should be dismissed. The Wise brothers did not breach their duties under s. 122(1) of the CBCA , nor were the impugned transactions in violation of s. 100 of the BIA .
The fiduciary duty under s. 122(1) (a) of the CBCA requires directors and officers to act in good faith and honestly vis-à-vis the corporation. Here, the trial judge found that there was no fraud or dishonesty in the Wise brothers’ attempts to solve the mounting inventory problems of Peoples and Wise. The Wise brothers considered the serious inventory management problem and implemented a joint inventory procurement policy they hoped would solve it. In the absence of evidence of a personal interest or improper purpose in the new policy, and in light of the evidence of a desire to make both Wise and Peoples “better” corporations, the directors did not breach their fiduciary duty under s. 122(1) (a). An honest and good faith attempt to redress a corporation’s financial problems does not, if unsuccessful, qualify as such a breach. The fiduciary duty does not change when a corporation is in the nebulous “vicinity of insolvency”. At all times, they owe their fiduciary obligations to the corporation, and the corporations’ interests are not to be confused with the interests of the creditors or those of any other stakeholder. There is no need to read the interests of creditors into the fiduciary duty set out in s. 122(1) (a) in light of the availability under the CBCA both of the oppression remedy (s. 241(2) (c)) and of an action based on the duty of care (s. 122(1) (b)).
Directors and officers will not be held to be in breach of the duty of care under s. 122(1) (b) of the CBCA if they act prudently and on a reasonably informed basis. The standard of care is an objective one. The decisions of directors and officers must be reasonable business decisions in light of all the circumstances, including the prevailing socio-economic conditions, about which they knew or ought to have known. While courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are often involved in corporate decision-making, they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision. In this case, in adopting the joint inventory procurement policy, the directors did not breach their duty of care in respect of Peoples’ creditors. The implementation of the new policy was a reasonable business decision made with a view to rectifying a serious and urgent business problem in circumstances in which no solution may have been possible. The trial judge’s conclusion that the new policy led inexorably to Peoples’ failure and bankruptcy was factually incorrect and constituted a palpable and overriding error. Many factors other than the new policy contributed more directly to Peoples’ bankruptcy.
Section 44(2) of the CBCA as it then read (the provision has since been repealed) cannot exempt directors and officers from potential liability under s. 122(1) for any financial assistance given by subsidiaries to the parent corporation. Nor can the Wise brothers successfully invoke good faith reliance on the opinion of the vice-president of administration and finance under s. 123(4) (b) of the CBCA . As a non-professional employee, the vice-president did not belong to any of the professional groups named in s. 123(4) (b). He was not an accountant, was not subject to the regulatory overview of any professional organization and did not carry independent insurance coverage for professional negligence.
The trustee’s claim under s. 100 of the BIA must fail. The relevant transactions are those spanning the period from February to December 1994 when the new procurement policy was in effect. With regard to all the circumstances of this case, a disparity of slightly more than six percent between fair market value and the consideration received does not constitute a conspicuous difference.
While, in light of this conclusion, there is no need to consider whether the Wise brothers would have been “privy” to the transactions, the disagreement between the trial judge and the Court of Appeal on the interpretation of “privy” in s. 100(2) of the BIA warrants the following comments. Since the provision’s remedial purpose is to reverse the effects of a transaction that stripped value from the estate of a bankrupt person, the word “privy” should be given a broad reading to include those who benefit directly or indirectly from, and have knowledge of, a transaction occurring for less than fair market value. This rationale is particularly apt when those who benefit are the controlling minds behind the transaction.
Cases Cited
Applied: 373409 Alberta Ltd. (Receiver of) v. Bank of Montreal, [2002] 4 S.C.R. 312, 2002 SCC 81; approved: Re Olympia & York Enterprises Ltd. and Hiram Walker Resources Ltd. (1986), 59 O.R. (2d) 254; Standard Trustco Ltd. (Trustee of) v. Standard Trust Co. (1995), 26 O.R. (3d) 1; referred to: Automatic Self-Cleansing Filter Syndicate Co. v. Cuninghame, [1906] 2 Ch. 34; K.L.B. v. British Columbia, [2003] 2 S.C.R. 403, 2003 SCC 51; Canadian Aero Service Ltd. v. O’Malley, [1974] S.C.R. 592; 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 123, aff’d (1991), 3 B.L.R. (2d) 113; Teck Corp. v. Millar (1972), 33 D.L.R. (3d) 288; Brasserie Labatt ltée v. Lanoue, [1999] Q.J. No. 1108 (QL); Regent Taxi & Transport Co. v. Congrégation des Petits Frères de Marie, [1929] S.C.R. 650, rev’d [1932] 2 D.L.R. 70; Lister v. McAnulty, [1944] S.C.R. 317; Hôpital Notre-Dame de l’Espérance v. Laurent, [1978] 1 S.C.R. 605; Dovey v. Cory, [1901] A.C. 477; In re Brazilian Rubber Plantations and Estates, Ltd., [1911] 1 Ch. 425; In re City Equitable Fire Insurance Co., [1925] 1 Ch. 407; Soper v. Canada, [1998] 1 F.C. 124; Maple Leaf Foods Inc. v. Schneider Corp. (1998), 42 O.R. (3d) 177; Skalbania (Trustee of) v. Wedgewood Village Estates Ltd. (1989), 37 B.C.L.R. (2d) 88.
Statutes and Regulations Cited
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3, s. 100(1) [repl. 1997, c. 12, s. 81], (2).
Canada Business Corporations Act, R.S.C. 1985, c. C‑44, ss. 44(1) [rep. 2001, c. 14, s. 26], (2) [idem], 102(1) [repl. idem, s. 35 ], 121, 122(1) [am. idem, s. 135 (Sch., item 43)], 123(4) [now 123(5)], 185, 238, 239, 240, 241.
Civil Code of Québec, S.Q. 1991, c. 64, arts. 300, 311, 1457, 2501.
Interpretation Act, R.S.C. 1985, c. I‑21, s. 8.1 .
Authors Cited
Allen, William T., Jack B. Jacobs and Leo E. Strine, Jr. “Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law” (2001), 26 Del. J. Corp. L. 859.
Beck, Stanley M. “Minority Shareholders’ Rights in the 1980s”. In Corporate Law in the 80s, Special Lectures of the Law Society of Upper Canada. Don Mills, Ont.: Richard De Boo, 1982, 311.
Brock, Jason. “The Propriety of Profitmaking: Fiduciary Duty and Unjust Enrichment” (2000), 58 U.T. Fac. L. Rev. 185.
Crête, Raymonde, et Stéphane Rousseau. Droit des sociétés par actions: principes fondamentaux. Montréal: Thémis, 2002.
Dickerson, Robert W. V., John L. Howard and Leon Getz. Proposals for a New Business Corporations Law for Canada, vols. I and II. Ottawa: Information Canada, 1971.
Gray, Wayne D. “Peoples v. Wise and Dylex: Identifying Stakeholder Interests upon or near Corporate Insolvency — Stasis or Pragmatism?” (2003), 39 Can. Bus. L.J. 242.
Houlden, L. W., and G. B. Morawetz. Bankruptcy and Insolvency Law of Canada, vol. 2, 3rd ed. Toronto: Carswell, 1989 (loose-leaf updated 2003, release 9).
Iacobucci, Edward M. “Directors’ Duties in Insolvency: Clarifying What Is at Stake” (2003), 39 Can. Bus. L.J. 398.
Iacobucci, Edward M., and Kevin E. Davis. “Reconciling Derivative Claims and the Oppression Remedy” (2000), 12 S.C.L.R. (2d) 87.
Martel, Paul. “Le ‘voile corporatif’ — l’attitude des tribunaux face à l’article 317 du Code civil du Québec” (1998), 58 R. du B. 95.
McGuinness, Kevin Patrick. The Law and Practice of Canadian Business Corporations. Toronto: Butterworths, 1999.
Thomson, David. “Directors, Creditors and Insolvency: A Fiduciary Duty or a Duty Not to Oppress?” (2000), 58 U.T. Fac. L. Rev. 31.
APPEAL from a judgment of the Quebec Court of Appeal, [2003] R.J.Q. 796, 224 D.L.R. (4th) 509, 41 C.B.R. (4th) 225, [2003] Q.J. No. 505 (QL), setting aside a decision of the Superior Court (1998), 23 C.B.R. (4th) 200, [1998] Q.J. No. 3571 (QL). Appeal dismissed.
Gerald F. Kandestin, Gordon Kugler and Gordon Levine, for the appellant.
Éric Lalanne and Martin Tétreault, for the respondents Lionel Wise, Ralph Wise and Harold Wise.
Ian Rose and Odette Jobin-Laberge, for the respondent Chubb Insurance Company of Canada.
The judgment of the Court was delivered by
Major and Deschamps JJ. —
I. Introduction
1 The principal question raised by this appeal is whether directors of a corporation owe a fiduciary duty to the corporation’s creditors comparable to the statutory duty owed to the corporation. For the reasons that follow, we conclude that directors owe a duty of care to creditors, but that duty does not rise to a fiduciary duty. We agree with the disposition of the Quebec Court of Appeal. The appeal is therefore dismissed.
2 As a result of the demise in the mid-1990s of two major retail chains in eastern Canada, Wise Stores Inc. (“Wise”) and its wholly-owned subsidiary, Peoples Department Stores Inc. (“Peoples”), the indebtedness of a number of Peoples’ creditors went unsatisfied. In the wake of the failure of the two chains, Caron Bélanger Ernst & Young Inc., Peoples’ trustee in bankruptcy (“trustee”), brought an action against the directors of Peoples. To address the trustee’s claims, the extent of the duties imposed by s. 122(1) of the Canada Business Corporations Act, R.S.C. 1985, c. C‑44 (“CBCA ”), upon directors with respect to creditors must be determined; we must also identify the purpose and reach of s. 100 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3 (“BIA ”).
3 In our view, it has not been established that the directors of Peoples violated either the fiduciary duty or the duty of care imposed by s. 122(1) of the CBCA . As for the trustee’s submission regarding s. 100 of the BIA , we agree with the Court of Appeal that the consideration received in the impugned transactions was not “conspicuously” less than fair market value. The BIA claim fails on that basis.
II. Background
4 Wise was founded by Alex Wise in 1930 as a small clothing store on St-Hubert Street in Montreal. By 1992, through expansion effected by a mix of internal growth and acquisitions, it had become an enterprise operating at 50 locations with annual sales of approximately $100 million, and it had been listed on the Montreal Stock Exchange in 1986. The stores were, for the most part, located in urban areas in Quebec. The founder’s three sons, Lionel, Ralph and Harold Wise (“Wise brothers”), were majority shareholders, officers, and directors of Wise. Together, they controlled 75 percent of the firm’s equity.
5 In 1992, Peoples had been in business continuously in one form or another for 78 years. It had operated as an unincorporated division of Marks & Spencer Canada Inc. (“M & S”) until 1991, when it was incorporated as a separate company. M & S itself was wholly owned by the large British firm, Marks & Spencer plc. (“M & S plc.”). Peoples’ 81 stores were generally located in rural areas, from Ontario to Newfoundland. Peoples had annual sales of about $160 million, but was struggling financially. Its annual losses were in the neighbourhood of $10 million.
6 Wise and Peoples competed with other chains such as Canadian Tire, Greenberg, Hart, K‑Mart, M‑Stores, Metropolitan Stores, Rossy, Woolco and Zellers. Retail competition in eastern Canada was intense in the early 1990s. In 1992, M‑Stores went bankrupt. In 1994, Greenberg and Metropolitan Stores followed M‑Stores into bankruptcy. The 1994 entry of Wal-Mart into the Canadian market, with its acquisition of over 100 Woolco stores from Woolworth Canada Inc., exerted significant additional competitive pressure on retail stores.
7 Lionel Wise, the eldest of the three brothers and Wise’s executive vice-president, had expressed an interest in acquiring the ailing Peoples chain from M & S as early as 1988. Initially, M & S did not share Wise’s interest for the sale, but by late 1991, M & S plc., the British parent company of M & S, had decided to divest itself of all its Canadian operations. At this point, M & S incorporated each of its three Canadian divisions to facilitate the anticipated divestiture thereof.
8 The new-found desire to sell coincided with Wise’s previously expressed interest in acquiring its larger rival. Although M & S had initially hoped to sell Peoples for cash to a large firm in a solid financial condition, it was unable to do so. Consequently, negotiations got underway with representatives of Wise. A formal share purchase agreement was drawn up in early 1992 and executed in June 1992, with July 16, 1992 as its closing date.
9 Wise incorporated a company, 2798832 Canada Inc., for the purpose of acquiring all of the issued and outstanding shares of Peoples from M & S. The $27‑ million share acquisition proceeded as a fully leveraged buyout. The portion of the purchase price attributable to inventory was discounted by 30 percent. The discount was designed to inject equity into Peoples in the fiscal year following the sale and to make use of some of the tax losses that had accumulated in prior years.
10 The amount of the down payment due to M & S at closing, $5 million, was borrowed from the Toronto Dominion Bank (“TD Bank”). According to the terms of the share purchase agreement, the $22‑million balance of the purchase price would be carried by M & S and would be repaid over a period of eight years. Wise guaranteed all of 2798832 Canada Inc.’s obligations pursuant to the terms of the share purchase agreement.
11 To protect its interests, M & S took the assets of Peoples as security (subject to a priority in favour of the TD Bank) and negotiated strict covenants concerning the financial management and operation of the company. Among other requirements, 2798832 Canada Inc. and Wise were obligated to maintain specific financial ratios, and Peoples was not permitted to provide financial assistance to Wise. In addition, the agreement provided that Peoples could not be amalgamated with Wise until the purchase price had been paid. This prohibition was presumably intended to induce Wise to refinance and pay the remainder of the purchase price as early as possible in order to overcome the strict conditions imposed upon it under the share purchase agreement.
12 On January 31, 1993, 2798832 Canada Inc. was amalgamated with Peoples. The new entity retained Peoples’ corporate name. Since 2798832 Canada Inc. had been a wholly-owned subsidiary of Wise, upon amalgamation the new Peoples became a subsidiary directly owned and controlled by Wise. The three Wise brothers were Peoples’ only directors.
13 Following the acquisition, Wise had attempted to rationalize its operations by consolidating the overlapping corporate functions of Wise and Peoples, and operating as a group. The consolidation of the administration, accounting, advertising and purchasing departments of the two corporations was completed by the fall of 1993. As a consequence of the changes, many of Wise’s employees worked for both firms but were paid solely by Wise. The evidence at trial was that because of the tax losses carried-forward by Peoples, it was advantageous for the group to have more expenses incurred by Wise, which, if the group was profitable as a whole, would increase its after-tax profits. Almost from the outset, the joint operation of Wise and Peoples did not function smoothly. Instead of the expected synergies, the consolidation resulted in dissonance.
14 After the acquisition, the total number of buyers for the two companies was nearly halved. The procurement policy at that point required buyers to deal simultaneously with suppliers on behalf of both Peoples and Wise. For the buyers, this nearly doubled their administrative work. Separate invoices were required for purchases made on behalf of Wise and Peoples. These invoices had to be separately entered into the system, tracked and paid.
15 Inventory, too, was separately recorded and tracked in the system. However, the inventory of each company was handled and stored, often unsegregated, in shared warehouse facilities. The main warehouse for Peoples, on Cousens Street in Ville St-Laurent, was maintained for and used by both firms. The Cousens warehouse saw considerable activity, as it was the central distribution hub for both chains. The facility was open 18 hours a day and employed 150 people on two shifts who handled a total of approximately 30,000 cartons daily through 20 loading docks. It was abuzz with activity.
16 Before long, the parallel bookkeeping combined with the shared warehousing arrangements caused serious problems for both Wise and Peoples. The actual situation in the warehouse often did not mirror the reported state of the inventory in the system. The goods of one company were often inextricably commingled and confused with the goods of the other. As a result, the inventory records of both companies were increasingly incorrect. A physical inventory count was conducted to try to rectify the situation, to little avail. Both Wise and Peoples stores experienced numerous shipping disruptions and delays. The situation, already unsustainable, was worsening.
17 In October 1993, Lionel Wise consulted David Clément, Wise’s (and, after the acquisition, Peoples’) vice-president of administration and finance, in an attempt to find a solution. In January 1994, Clément recommended and the three Wise brothers agreed that they would implement a joint inventory procurement policy (“new policy”) whereby the two firms would divide responsibility for purchasing. Peoples would make all purchases from North American suppliers and Wise would, in turn, make all purchases from overseas suppliers. Peoples would then transfer to Wise what it had purchased for Wise, charging Wise accordingly, and vice versa. The new policy was implemented on February 1, 1994. It was this arrangement that was later criticized by certain creditors and by the trial judge.
18 Approximately 82 percent of the total inventory of Wise and Peoples was purchased from North American suppliers, which inevitably meant that Peoples would be extending a significant trade credit to Wise. The new policy was known to the directors, but was neither formally implemented in writing nor approved by a board meeting or resolution.
19 On April 27, 1994, Lionel Wise outlined the details of the new policy at a meeting of Wise’s audit committee. A partner of Coopers & Lybrand was M & S’s representative on Wise’s board of directors and a member of the audit committee. He attended the April 27th meeting and raised no objection to the new policy when it was introduced.
20 By June 1994, financial statements prepared to reflect the financial position of Peoples as of April 30, 1994 revealed that Wise owed more than $18 million to Peoples. Approximately $14 million of this amount resulted from a notional transfer of inventory that was cancelled following the period’s end. M & S was concerned about the situation and started an investigation, as a result of which M & S insisted that the new procurement policy be rescinded. Wise agreed to M & S’s demand but took the position that the former procurement policy could not be reinstated immediately. An agreement was executed on September 27, 1994, effective July 21, 1994, and it provided that the new policy would be abandoned as of January 31, 1995. The agreement also specified that the inventory and records of the two companies would be kept separate, and that the amount owed to Peoples by Wise would not exceed $3 million.
21 Another result of the negotiations was that M & S accepted an increase in the amount of the TD Bank’s priority to $15 million and a new repayment schedule for the balance of the purchase price owed to M & S. The parties agreed to revise the schedule to provide for 37 monthly payments beginning in July 1995. Each of the Wise brothers also provided a personal guarantee of $500,000 in favour of M & S.
22 In September 1994, in light of the fragile financial condition of the companies and the competitiveness of the retail market, the TD Bank announced its intention to cease doing business with Wise and Peoples as of the end of December 1994. Following negotiations, however, the bank extended its financial support until the end of July 1995. The Wise brothers promised to extend personal guarantees in favour of the TD Bank, but this did not occur.
23 In December 1994, three days after the Wise brothers presented financial statements showing disappointing results for Peoples in its third fiscal quarter, M & S initiated bankruptcy proceedings against both Wise and Peoples. A notice of intention to make a proposal was filed on behalf of Peoples the same day. Nonetheless, Peoples later consented to the petition by M & S, and both Wise and Peoples were declared bankrupt on January 13, 1995, effective December 9, 1994. The same day, M & S released each of the Wise brothers from their personal guarantees. M & S apparently preferred to proceed with an uncontested petition in bankruptcy rather than attempting to collect on the personal guarantees.
24 The assets of Wise and Peoples were sufficient to cover in full the outstanding debt owed to the TD Bank, satisfy the entire balance of the purchase price owed to M & S, and discharge almost all the landlords’ lease claims. The bulk of the unsatisfied claims were those of trade creditors.
25 Following the bankruptcy, Peoples’ trustee filed a petition against the Wise brothers. In the petition, the trustee claimed that they had favoured the interests of Wise over Peoples to the detriment of Peoples’ creditors, in breach of their duties as directors under s. 122(1) of the CBCA . The trustee also claimed that the Wise brothers had, in the year preceding the bankruptcy, been privy to transactions in which property had been transferred for conspicuously less than fair market value within the meaning of s. 100 of the BIA .
26 Pursuant to art. 2501 of the Civil Code of Québec, S.Q. 1991, c. 64 (“C.C.Q.”), the trustee named Chubb Insurance Company of Canada (“Chubb”), which had provided directors’ insurance to Wise and its subsidiaries, as a defendant in addition to the Wise brothers.
27 The trial judge, Greenberg J., relying on decisions from the United Kingdom, Australia and New Zealand, held that the fiduciary duty and the duty of care under s. 122(1) of the CBCA extend to a company’s creditors when a company is insolvent or in the vicinity of insolvency. Greenberg J. found that the implementation, by the Wise brothers qua directors of Peoples, of a corporate policy that affected both companies, had occurred while the corporation was in the vicinity of insolvency and was detrimental to the interests of the creditors of Peoples. The Wise brothers were therefore found liable and the trustee was awarded $4.44 million in damages. As Chubb had provided insurance coverage for directors, it was also held liable. Greenberg J. also considered the alternative grounds under the BIA advanced by the trustee and found the Wise brothers liable for the same $4.44 million amount on that ground as well. All the parties appealed.
28 The Quebec Court of Appeal, per Pelletier J.A., with Robert C.J.Q. and Nuss J.A. concurring, allowed the appeals by Chubb and the Wise brothers: [2003] R.J.Q. 796, [2003] Q.J. No. 505 (QL). The Court of Appeal expressed reluctance to follow Greenberg J. in equating the interests of creditors with the best interests of the corporation when the corporation was insolvent or in the vicinity of insolvency, stating that an innovation in the law such as this is a policy matter more appropriately dealt with by Parliament than the courts. In considering the trustee’s claim under s. 100 of the BIA , Pelletier J.A. held that the trial judge had committed a palpable and overriding error in concluding that the amounts owed by Wise to Peoples in respect of inventory “were neither collected nor collectible” (para. 125 QL). He found that the consideration received for the transactions had been approximately 94 percent of fair market value, and he was not convinced that this disparity could be characterized as being “conspicuously” less than fair market value. Moreover, he did not accept the broad meaning the trial judge gave to the word “privy”. Pelletier J.A. declined to exercise his discretion under s. 100(2) of the BIA to make an order in favour of the trustee. In view of his conclusion that the Wise brothers were not liable, Pelletier J.A. allowed the appeal with respect to Chubb.
III. Analysis
29 At the outset, it should be acknowledged that according to art. 300 C.C.Q. and s. 8.1 of the Interpretation Act, R.S.C. 1985, c. I‑21 , the civil law serves as a supplementary source of law to federal legislation such as the CBCA . Since the CBCA does not entitle creditors to sue directors directly for breach of their duties, it is appropriate to have recourse to the C.C.Q. to determine how rights grounded in a federal statute should be addressed in Quebec, and more specifically how s. 122(1) of the CBCA can be harmonized with the principles of civil liability: see R. Crête and S. Rousseau, Droit des sociétés par actions: principes fondamentaux (2002), at p. 58.
30 This case came before our Court on the issue of whether directors owe a duty to creditors. The creditors did not bring a derivative action or an oppression remedy application under the CBCA . Instead, the trustee, representing the interests of the creditors, sued the directors for an alleged breach of the duties imposed by s. 122(1) of the CBCA . The standing of the trustee to sue was not questioned.
31 The primary role of directors is described in s. 102(1) of the CBCA :
102. (1) Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.
As for officers, s. 121 of the CBCA provides that their powers are delegated to them by the directors:
121. Subject to the articles, the by-laws or any unanimous shareholder agreement,
(a) the directors may designate the offices of the corporation, appoint as officers persons of full capacity, specify their duties and delegate to them powers to manage the business and affairs of the corporation, except powers to do anything referred to in subsection 115(3);
(b) a director may be appointed to any office of the corporation; and
(c) two or more offices of the corporation may be held by the same person.
Although the shareholders are commonly said to own the corporation, in the absence of a unanimous shareholder agreement to the contrary, s. 102 of the CBCA provides that it is not the shareholders, but the directors elected by the shareholders, who are responsible for managing it. This clear demarcation between the respective roles of shareholders and directors long predates the 1975 enactment of the CBCA : see Automatic Self-Cleansing Filter Syndicate Co. v. Cuninghame, [1906] 2 Ch. 34 (C.A.); see also art. 311 C.C.Q.
32 Section 122(1) of the CBCA establishes two distinct duties to be discharged by directors and officers in managing, or supervising the management of, the corporation:
122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall
(a) act honestly and in good faith with a view to the best interests of the corporation; and
(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
The first duty has been referred to in this case as the “fiduciary duty”. It is better described as the “duty of loyalty”. We will use the expression “statutory fiduciary duty” for purposes of clarity when referring to the duty under the CBCA . This duty requires directors and officers to act honestly and in good faith with a view to the best interests of the corporation. The second duty is commonly referred to as the “duty of care”. Generally speaking, it imposes a legal obligation upon directors and officers to be diligent in supervising and managing the corporation’s affairs.
33 The trial judge did not apply or consider separately the two duties imposed on directors by s. 122(1) . As the Court of Appeal observed, the trial judge appears to have confused the two duties. They are, in fact, distinct and are designed to secure different ends. For that reason, they will be addressed separately in these reasons.
A. The Statutory Fiduciary Duty: Section 122(1) (a) of the CBCA
34 Considerable power over the deployment and management of financial, human, and material resources is vested in the directors and officers of corporations. For the directors of CBCA corporations, this power originates in s. 102 of the Act. For officers, this power comes from the powers delegated to them by the directors. In deciding to invest in, lend to or otherwise deal with a corporation, shareholders and creditors transfer control over their assets to the corporation, and hence to the directors and officers, in the expectation that the directors and officers will use the corporation’s resources to make reasonable business decisions that are to the corporation’s advantage.
35 The statutory fiduciary duty requires directors and officers to act honestly and in good faith vis-à-vis the corporation. They must respect the trust and confidence that have been reposed in them to manage the assets of the corporation in pursuit of the realization of the objects of the corporation. They must avoid conflicts of interest with the corporation. They must avoid abusing their position to gain personal benefit. They must maintain the confidentiality of information they acquire by virtue of their position. Directors and officers must serve the corporation selflessly, honestly and loyally: see K. P. McGuinness, The Law and Practice of Canadian Business Corporations (1999), at p. 715.
36 The common law concept of fiduciary duty was considered in K.L.B. v. British Columbia, [2003] 2 S.C.R. 403, 2003 SCC 51. In that case, which involved the relationship between the government and foster children, a majority of this Court agreed with McLachlin C.J. who stated, at paras. 40‑41 and 49:
Fiduciary duties arise in a number of different contexts, including express trusts, relationships marked by discretionary power and trust, and the special responsibilities of the Crown in dealing with aboriginal interests. . . .
What . . . might the content of the fiduciary duty be if it is understood . . . as a private law duty arising simply from the relationship of discretionary power and trust between the Superintendent and the foster children? In Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574, at pp. 646‑47, La Forest J. noted that there are certain common threads running through fiduciary duties that arise from relationships marked by discretionary power and trust, such as loyalty and “the avoidance of a conflict of duty and interest and a duty not to profit at the expense of the beneficiary”. However, he also noted that “[t]he obligation imposed may vary in its specific substance depending on the relationship” (p. 646). . . .
. . .
. . . concern for the best interests of the child informs the parental fiduciary relationship, as La Forest J. noted in M. (K.) v. M. (H.), supra, at p. 65. But the duty imposed is to act loyally, and not to put one’s own or others’ interests ahead of the child’s in a manner that abuses the child’s trust. . . . The parent who exercises undue influence over the child in economic matters for his own gain has put his own interests ahead of the child’s, in a manner that abuses the child’s trust in him. The same may be said of the parent who uses a child for his sexual gratification or a parent who, wanting to avoid trouble for herself and her household, turns a blind eye to the abuse of a child by her spouse. The parent need not, as the Court of Appeal suggested in the case at bar, be consciously motivated by a desire for profit or personal advantage; nor does it have to be her own interests, rather than those of a third party, that she puts ahead of the child’s. It is rather a question of disloyalty — of putting someone’s interests ahead of the child’s in a manner that abuses the child’s trust. Negligence, even aggravated negligence, will not ground parental fiduciary liability unless it is associated with breach of trust in this sense. [Emphasis added.]
37 The issue to be considered here is the “specific substance” of the fiduciary duty based on the relationship of directors to corporations under the CBCA .
38 It is settled law that the fiduciary duty owed by directors and officers imposes strict obligations: see Canadian Aero Service Ltd. v. O’Malley, [1974] S.C.R. 592, at pp. 609‑10, per Laskin J. (as he then was), where it was decided that directors and officers may even have to account to the corporation for profits they make that do not come at the corporation’s expense:
The reaping of a profit by a person at a company’s expense while a director thereof is, of course, an adequate ground upon which to hold the director accountable. Yet there may be situations where a profit must be disgorged, although not gained at the expense of the company, on the ground that a director must not be allowed to use his position as such to make a profit even if it was not open to the company, as for example, by reason of legal disability, to participate in the transaction. An analogous situation, albeit not involving a director, existed for all practical purposes in the case of Phipps v. Boardman [[1967] 2 A.C. 46], which also supports the view that liability to account does not depend on proof of an actual conflict of duty and self-interest. Another, quite recent, illustration of a liability to account where the company itself had failed to obtain a business contract and hence could not be regarded as having been deprived of a business opportunity is Industrial Development Consultants Ltd. v. Cooley [[1972] 2 All E.R. 162], a judgment of a Court of first instance. There, the managing director, who was allowed to resign his position on a false assertion of ill health, subsequently got the contract for himself. That case is thus also illustrative of the situation where a director’s resignation is prompted by a decision to obtain for himself the business contract denied to his company and where he does obtain it without disclosing his intention. [Emphasis added.]
A compelling argument for making directors accountable for profits made as a result of their position, though not at the corporation’s expense, is presented by J. Brock, “The Propriety of Profitmaking: Fiduciary Duty and Unjust Enrichment” (2000), 58 U.T. Fac. L. Rev. 185, at pp. 204‑5.
39 However, it is not required that directors and officers in all cases avoid personal gain as a direct or indirect result of their honest and good faith supervision or management of the corporation. In many cases the interests of directors and officers will innocently and genuinely coincide with those of the corporation. If directors and officers are also shareholders, as is often the case, their lot will automatically improve as the corporation’s financial condition improves. Another example is the compensation that directors and officers usually draw from the corpora