Directors and Officers Fiduciary Duties Not Extended
When a corporation becomes insolvent or has entered
the nebulous "vicinity of insolvency", one can expect
litigation from corporate stakeholders aimed at holding directors
and officers accountable for the losses. In Peoples Department Stores
Inc. (Trustee of) v. Wise, 2004 SCC 68, the Supreme Court of Canada
was asked by the corporation's trustee in bankruptcy to decide whether
directors of a corporation owe a fiduciary duty to the corporation's
creditors comparable to the statutory fiduciary duty they owe to
Wise Stores Inc. acquired Peoples Department Stores
Inc. from Marks and Spencer Canada Inc. The Wise brothers were majority
shareholders, officers and directors of Wise Stores, and the only
directors of Peoples. Because of covenants imposed by Marks &
Spencer, Peoples could not be merged with Wise until the purchase
price had been paid. The joint operation of Wise and Peoples did
not function smoothly. Their inventory records were increasingly
incorrect. To address the worsening situation, the directors of
the two companies implemented a new joint inventory procurement
policy whereby the two firms would divide responsibility for purchasing.
Before the end of 1994, both Wise and Peoples declared bankruptcy.
Peoples' bankruptcy trustee filed a petition against the Wise brothers,
claiming 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
Subsection 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. The first duty has
been referred to as the "fiduciary duty". 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.
The Court observed that the statutory fiduciary duty
requires directors and officers to act honestly and in good faith
vis-à-vis the corporation. They must:
1. 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.
2. avoid conflicts of interest with the corporation
3. avoid abusing their position to gain personal benefit, and
4. maintain the confidentiality of information they acquire by virtue
of their position.
For directors and officers, the fiduciary duty to
the corporation arises from their relationship with the corporation
that is marked by discretionary power and trust. The phrase the
"best interests of the corporation" should be read not
simply as the "best interests of the shareholders". From
an economic perspective, the "best interests of the corporation"
means the maximization of the value of the corporation. The Court
accepted the principle that in determining whether they are acting
with a view to the best interests of the corporation it may be legitimate,
given all the circumstances of a given case, for the board of directors
to consider the interests of shareholders, employees, suppliers,
creditors, consumers, governments and the environment. However,
the Court emphasized that "[a]t all times, directors and officers
owe their fiduciary obligation to the corporation. The interests
of the corporation are not to be confused with the interests of
the creditors those of any other stakeholders."
The interests of shareholders, those of the creditors
and those of the corporation may and will be consistent with each
other if the corporation is profitable and well capitalized and
has strong prospects. However, this can change if the corporation
starts to struggle financially. As the corporation approaches the
"vicinity of insolvency", the residual claims of shareholders
will be nearly exhausted:
While shareholders might well prefer that the directors
pursue high-risk alternatives with a high potential payoff to maximize
the shareholders' expected residual claim, creditors in the same
circumstances might prefer that the directors steer a safer course
so as to maximize the value of their claims against the assets of
The directors' fiduciary duty does not change when
a corporation is in the nebulous "vicinity of insolvency".
In assessing the actions of directors, any honest and good faith
attempt to redress the corporation's financial problems will, if
successful, both retain value for shareholders and improve the position
of creditors. If unsuccessful, it will not qualify as a breach of
the statutory fiduciary duty.
The oppression remedy of s. 241(2)(c) of the CBCA
and the similar provisions of provincial legislation regarding corporations
grant the broadest rights to creditors of any common law jurisdiction.
Section 241(2)(c) authorizes a court to grant a remedy if the powers
of the directors of the corporation or any of its affiliates are
or have been exercised in a manner that is oppressive or unfairly
prejudicial to or that unfairly disregards the interests of any
security holder, creditor, director or officer. Section 241 of the
CBCA provides a possible mechanism for creditors to protect their
interests from the prejudicial conduct of directors. According to
the Court, the availability of such a broad oppression remedy undermines
any perceived need to extend the fiduciary duty imposed on directors
by s. 122(1)(a) of the CBCA to include creditors. The trustee did
not seek an oppression remedy.
In light of the availability both of the oppression
remedy and of an action based on the duty of care, stakeholders
have viable remedies at their disposal. There is no need to read
the interests of creditors into the duty set out in s. 122(1)(a)
of the CBCA. Moreover, in the circumstances of this case, the Court
found that the Wise brothers did not breach the statutory fiduciary
duty owed to the corporation.
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 decisions they make must
be reasonable business decisions in light of all the circumstances
about which the directors or officers knew or ought to have known.
The implementation of the new inventory policy was
found to be a reasonable business decision that was made with a
view to rectifying a serious and urgent business problem in circumstances
in which no solution may have been possible.
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