A recent decision of the Superior Court of Justice is a helpful reminder of the personal liability a corporate director may face in relation to an oppression claim brought by a creditor of that corporation. Creditors looking to pursue claims against a debtor corporation that may have insufficient assets to satisfy the claim would be wise to consider seeking an oppression remedy against that corporation’s directors or officers if the situation appears to meet the legal principles discussed in BMO v. Andrzej and Associates Property Management Inc.
The BMO decision involved a cheque deposited into the corporate defendant’s bank account. About a month after this deposit, withdrawals and e-transfers were made from the account, but the cheque was eventually dishonoured. By that time, the account was overdrafted.
BMO sued the corporate defendant for the face amount of the dishonoured cheque. It also sued the individual defendant, R, who it alleged was a director of the corporate defendant and allegedly deposited the cheque into the company’s bank account. Specifically, BMO alleged that the individual defendant, R, was liable for oppressive conduct against BMO under section 248 of the Ontario Business Corporations Act.
Included in BMO’s claim was the allegation that the individual defendant, R, “perpetuated a fraud” upon the bank by depositing the cheque into the account and then withdrawing funds when R knew or should have known the cheque would be returned. It also alleged that the cheque was dishonoured due to a “material alteration,” though it did not specifically plead that it was R who committed this material alteration.
BMO brought a motion for default judgment, which was the subject matter of the decision.
Generally, on a motion for default judgment, facts pleaded in a Statement of Claim are deemed to be admitted; however, this does not mean that the legal consequences of those facts are also deemed admitted. As such, the Court had to review the facts set out in the claim to determine whether or not they satisfied the legal test for a finding of fraud against the individual defendant, R.
The Court noted that the deemed admission that the individual defendant, R, cashed the cheque and was responsible for payments to and withdrawals from the account was inadequate to satisfy the legal test for fraud. It observed that “the mere fact of depositing a single cheque” that is ultimately dishonoured is not itself proof of fraud, “even if the funds that it covers are withdrawn before the default.” The Court also noted that the claim around the material alteration of the cheque was insufficient.
After finding that fraud against the individual defendant had not been proven, the Court considered the claim of oppression.
BMO alleged that the individual defendant, R, was personally liable for the face value of the dishonoured cheque by virtue of the oppression remedy found in section 248 of the Business Corporations Act.
The Court began its discussion by referencing the leading case on the topic, Wilson v. Alharayeri, in which the Supreme Court of Canada set out the applicable legal principles.
First, a finding of oppressive conduct is necessary. This requires that a complainant “identify the expectations that he or she claims have been violated by the conduct at issue and establish that the expectations were reasonably held.” The complainant must also establish that such expectations were “violated by corporate conduct that was oppressive or unfairly prejudicial to or that unfairly disregarded the interests of ‘any security holder, creditor, director or officer.’”
A finding of personal liability by a corporate director for such conduct then requires that the complainant show that (a) the director “must have exercised or failed to exercise his or her powers to effect the oppressive conduct” and (b) that personal liability is “fit in all the circumstances.” This latter finding requires consideration of fairness and equity.
A variety of factors are to be considered in determining whether personal liability is fit in the circumstances, including the following:
The Court stated that a finding of personal liability did not require a director to have acted in bad faith or to have obtained a personal benefit. However, these were “hallmarks of conduct properly attracting personal liability.”
The Superior Court of Justice concluded its decision by refusing to make a finding of oppression. Specifically, the Court noted that the cheque was possibly dishonoured for “innocent” reasons and that the withdrawals were made without knowledge surrounding the cheque. The Court stated it could not find that it would be equitable to make a declaration of oppression and personal liability under section 248 of the Business Corporations Act. Accordingly, the claim was dismissed against the individual defendant, R.
Creditors should remember that, while BMO was ultimately unsuccessful in this case, section 248 of the Business Corporations Act expressly affords a remedy to creditors provided they can satisfy the tests described above. Where the fraud of a particular director can be proven, the section provides a practical way of obtaining a judgment against that director personally.
Being a corporate director comes with significant responsibilities, and understanding personal liability nuances, especially oppression claims, is crucial. Our highly experienced corporate litigation lawyers at Milosevic & Associates in Toronto are skilled litigators who have seen it all. We excel at thinking on our feet and addressing the unexpected, helping our clients mitigate legal and financial risks effectively. Call us today at 416-916-1387 or contact us online for a consultation.
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