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Newsletters 2003 > 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.)




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