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July 2003
Bankruptcy Trustee's Oppression Remedy Case Allowed
To Proceed Against Directors & Officers
In a recent Ontario Superior Court decision, the trustee
of a bankrupt company, Dylex, commenced an action against, among
others, the former directors, officers and shareholders of Dylex.
The Trustee attacked the actions and transactions undertaken by
Dylex and another company, HWGI, pursuant to an Acquisition Agreement
between them under which HWGI acquired all of the shares of Dylex.
Dylex was put into bankruptcy four months later.
The Trustee claimed that the share acquisition was
oppressive or unfairly prejudicial to, or unfairly disregarded the
interests of Dylex's creditors; the share acquisition was in breach
of common law and statutory duties of care owed by the directors
and senior officers towards Dylex; and, in breach of a special duty
of care and fiduciary obligation to ensure that the interests of
the creditors would not be materially prejudiced by their conduct
in relation to the share acquisition.
The former directors and officers asked the court
for a determination of a question of law: whether the trustee in
bankruptcy had legal capacity to assert the oppression remedy claim,
and the breach of fiduciary duty claim? The court was also asked
to strike out portions of the Statement of Claim seeking damages
arising from the directors' alleged breach of duty to conduct investigations
into the moral character and background of HWGI for potential dishonesty.
With respect to the capacity of the trustee to bring
the claims, the defendants argued that the trustee had no higher
rights than the corporation itself whose board of directors had
approved the transaction in issue as held in Canada (Attorney
General) v. Standard Trustco (1991), 5 O.R. (3d) 660 (Ontario
Gen. Div.).
The motions judge held that the Standard Trustco case
was not followed by other courts, and cited Olympia & York
Developments Ltd. (Trustee of) v. Olympia & York Realty Corp.,
[2001] O.J. No. 3394 (S.C.J.) where it was held that the trustee
has, as his primary obligation, the protection of the creditors
of the estate of the bankrupt. Where there was added to the oppression
remedy allegations/facts to support one of the three claims of either
(a) "oppression", (b) "unfairly prejudicial"
or (c) "unfairly disregards", then creditors have been
permitted to be complainants pursuant to s. 245(c) of the CBCA as
a "proper person". Since a creditor could bring such an
oppression action under s. 248(2), then the trustee in bankruptcy
as the creditors' representative should be allowed to bring a "representative"
oppression action on behalf of the creditors in a proper case.
The motions judge held that the Trustee, as the creditors'
appointed representative, may be eligible to qualify as a proper
person to seek oppression remedy relief in these circumstances.
This is consistent with the long established policy that all proceedings
that may be brought for the benefit of the estate (whether they
belong to the bankrupt person or the creditors) shall vest exclusively
in the trustee. The court found that it was not plain and obvious
that the trustee in bankruptcy did not have such capacity.
As to whether directors owe any fiduciary duty to
creditors, the court observed that "Canadian law appears to
be moving in the direction of recognizing such fiduciary duty, particularly
in situations where the corporation was insolvent when it entered
into the challenged transaction or the challenged transaction rendered
the corporation insolvent."
Dylex Ltd. (Trustee of) v. Anderson (2003),
63 O.R. (3d) 659 (S.C.J.)
R.A.
This newsletter is published to keep our clients and
friends informed of new and important legal developments. The articles
are not intended to provide legal advice as
individual situations will differ and should be discussed with a
lawyer.
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