March 12, 2009
Legislative Amendments to Widen the “Director” Net in Insolvencies
Currently, neither the Bankruptcy and Insolvency Act nor the Companies’ Creditors Arrangement Act defines “director.” However, pending legislative amendments to the Bankruptcy and Insolvency Act (BIA) and Companies’ Creditors Arrangement Act (CCAA) will include an expansive definition of “director” that includes any person “occupying the position of director,” regardless of his or her formal title. While this definition is harmonious with the definition of “director” contained in the Canada Business Corporations Act (CBCA) and the Ontario Business Corporations Act (OBCA), it is a new addition to Canada’s insolvency regimes and may introduce unexpected liabilities for some participants in an insolvency.
The new definition of “director” under the BIA and CCAA may increase the risk of liability for those who are acting in a director’s capacity although they are not formally appointed as such. Specifically, this definition may apply to: (i) shareholders under a unanimous shareholders agreement and, potentially, the directors of such shareholders; (ii) de facto directors; and (iii) “deemed” directors.
Unanimous Shareholder Agreements
Pursuant to Section 146(5) of the CBCA and Section 108(5) of the OBCA, a shareholder who is a party to a unanimous shareholder agreement (USA) has all the rights, powers, duties and liabilities of a director of the corporation, whether arising under the CBCA, OBCA or otherwise, to the extent that the agreement restricts the powers of the directors to manage or supervise the management of the business and affairs of the corporation. The USA relieves the directors of the corporation of their duties and liabilities to the same extent.
Where a corporation as a shareholder is a party to a USA, the liabilities assumed by the corporation as a shareholder pursuant to the USA should be those of the shareholder corporation; but, there has yet to be a reported decision in Canada that confirms it is not directors of the shareholder corporation.
De facto Directors
A person may attract statutory liability as a de facto director if he or she: (i) is a former director whose term of office has expired but who has continued to act as a director; or (ii) takes upon himself or herself the office of director without proper appointment. To establish that a person is a de facto director, it must be shown that he or she exercised powers and authority normally possessed by a director. For example, where a person “steps up” to exercise leadership in insolvent circumstances, even though the person did not believe he or she was a director, and did not believe he or she had any authority to advise, influence or control the management or direction of the company, he or she may be treated as a de facto director.
A de facto director includes a “deemed” director. Under the CBCA and OBCA, any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director where all of the directors have resigned or been removed by the shareholders without replacement. The BIA and CCAA contain identical provisions in respect of proposals, compromises and arrangements.
A person is excepted from the “deemed” director rules under the CBCA and OBCA if he or she is: (i) an officer who manages under the direction or control of another person; (ii) a professional who participates in management solely for professional purposes; or (iii) a trustee in bankruptcy, receiver, receiver-manager or secured creditor who participates in management or exercises control over the corporation’s property solely for the purpose of enforcement of a security agreement or the realization of security or, in the case of a trustee in bankruptcy, administering the bankrupt’s estate. There are no such exceptions under the BIA or CCAA. As a result, while a person may be exempt from director liability under corporate law through exceptions to the “deemed” director rules, the person may still be subject to director liability under the BIA or CCAA.
Ceasing to Be a Director
The expansive definition of “director” under the CBCA, OBCA and pending BIA and CCAA amendments may be troublesome for de facto or “deemed” directors. There is no fixed rule to determine when a de facto or “deemed” director ceases to be a director - the courts will look to the conduct of the person.
As with any director, a de facto or “deemed” director will cease to be a director when a shareholder elects his or her replacement or if he or she resigns. However, resignation is not enough in and of itself. A former director must actually cease to manage or supervise the management of the company. The fact that a corporation ceases to carry on business is not relevant to the determination of whether a director ceases to be a director.
It remains to be seen how the definition of “director” will be interpreted in the context of the BIA and CCAA. However, persons involved in restructuring efforts who are not formally appointed as directors nevertheless will have reason to be cautious. They may find themselves caught within the expansive definition of “director” as a shareholder wielding powers under a USA or as a de facto or “deemed” director and, therefore, subject to director liabilities under the BIA or CCAA.