The Supreme Court of Canada Clarifies the Personal Liability of Directors in Oppression Cases

by Bennett Jones LLP

Bennett Jones LLP

In Wilson v. Alharayeri, 2017 SCC 39 [Alharayeri], the Supreme Court of Canada in a unanimous decision provides significant guidance as to when directors ought to be held personally liable for oppressive conduct under the statutory oppression remedy. While an oppression claim must always be judged on its own unique facts, the Court finds that it is more appropriate to hold directors personally liable where they acted in bad faith, in breach of their duties or in order to obtain a personal benefit.

Alharayeri also clarifies the standard of review on appeals of oppression applications. Given the fact-specific and discretionary nature of the oppression remedy, appellate courts should be deferential to findings made by trial courts on oppression applications.

Personal Liability of Directors in Oppression Cases

Alharayeri concerned the treatment of shareholders in the context of a dilutive private placement. The oppression claim concerned differential and more favourable treatment (the accelerated conversion) of a certain class of preferred shares held by the president of the company, as against two other classes of convertible preferred shares held by the complainant. The net effect was that the complainant’s proportion of common shares and their value were reduced considerably. The test for determining whether corporate directors may be held personally liable for oppression was established by the Ontario Court of Appeal in Budd v. Gentra (1998), BLR (2d) 27. The Budd test requires that:

  1. the oppressive conduct is properly attributable to the director because of his or her implication in the oppression; and
  2. imposing personal liability is “fit” in the circumstances.

In Alharayeri, the Supreme Court's analysis focused on the second prong of the Budd test, particularly the amorphous concept of whether personal liability is "fit." The Supreme Court identified four principles that "serve as guideposts informing the flexible and discretionary approach" of courts to the oppression remedy provisions under the Canada Business Corporations Act and provincial business corporation statutes.

First, the oppression remedy must be a fair way of dealing with the situation. The Supreme Court identified several indicia of fairness, while cautioning that the factors are not to be slavishly applied nor considered an exclusive list. They do, however, provide significant guidance. Holding a director personally liable may be more appropriate where there was a personal benefit to the director, the director acted in bad faith, or the director breached a personal duty or misused a corporate power. It may also be more appropriate to hold a director personally liable if granting a remedy against the corporation would unduly prejudice other securities holders.

Second, any order made under the oppression remedy provision should go no further than necessary to rectify the oppression. In accordance with the oppression remedy’s remedial purpose, the aim is to correct the injustice between the parties. Sometimes, such as where the director receives a personal benefit but did not act in bad faith, it may be appropriate for both the corporation and the director to bear a portion of the liability for the oppressive conduct.

Third, any remedial order may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders. The oppression remedy should not be a tool employed to vindicate expectations arising out of familial or personal relationships. In addition, courts should be wary of litigants seeking to impose personal liability on directors for tactical purposes.

Fourth, a court should consider the general corporate law context in excising its remedial discretion. Directors' liability "cannot be a surrogate for other forms of statutory or common law relief, particularly where such other relief may be more fitting in the circumstances." However, the Supreme Court emphasized that rigid common law principles traditionally limiting directors' liability at common law do not apply in oppression cases.

The Supreme Court’s approach to the statutory oppression remedy in this case is more confirmatory of existing jurisprudence than revolutionary. Nonetheless, the Court’s decision upholding the lower court’s finding of oppression against two directors personally is bound to be frequently cited going forward.

Standard of Review on the Appeal of an Oppression Application

In considering a claim for oppression, a court must engage in "fact-specific, contextual inquiries." Where the facts merit a remedy, the statutory oppression remedy provides the court with "broad, equitable jurisdiction to enforce not just what is legal but what is fair," enabling the superior court judge to make "any interim or final order it thinks fit."

Given the fact-specific and discretionary nature of the oppression remedy, the Supreme Court held that appellate courts should "adopt a deferential stance when reviewing judgments rendered on oppression applications."

Three principles govern the standard of review or the appeal of an oppression application. First, absent palpable and overriding error, an appellate court must defer to the trial court’s findings of fact. Second, an appellate court may substitute its own decision for the trial court’s if the trial judgment is based on errors of law, erroneous principles or irrelevant considerations. Third, an appellate court may intervene if the trial judgment is manifestly unjust.

While it is perhaps intuitive that an oppression remedy decision ought to be subject to appellate deference, the Supreme Court's judgment signals that litigants who are unsuccessful at the hearing of an oppression application will face significant challenges on appeal, absent special circumstances.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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