Activities giving rise to a claim against D&Os but that precede CCAA Proceedings are not indemnified under a Court-Ordered Directors’ Charge


This article has been contributed to the blog by Caitlin Fell and Arnaud Camu. Caitlin Fell is an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP and Arnaud Camu is a summer student at Osler, Hoskin & Harcourt LLP.

In Re Northstar Aerospace Inc., 2013 ONSC 1780, a motion was brought by the monitor in the Companies’ Creditors Arrangement Act (“CCAA”) proceedings of the Applicants, Northstar Aerospace Inc. et al., to determine the validity of specific claims made by the Ontario Ministry of the Environment (the “MOE”) and WeirFould LLP (the “Claimants”) against the Applicants’ Directors and Officers (D&Os) (the “Claims”).  The Claimants sought to establish that the Claims were valid claims for which the D&Os were indemnified pursuant to the indemnity contained in the Initial Order (the “Directors’ Charge”) and therefore the D&Os were entitled to the benefit of certain funds held in reserve by the monitor. The Court held that that the Claims did not properly constitute claims protected by the Directors’ Charge.
The Two Claims
The MOE submitted a claim against the D&Os “for costs incurred and to be incurred by the MOE in carrying out certain remediation activities” originally imposed on the Applicants in a Directors’ Order that the MOE issued in the past but that the Applicants had not complied with.  The MOE planned on requesting the carrying out of such activities previously required of the Applicants by submitting a future MOE Director’s Order against the D&Os.  In addition to the claim submitted by the MOE, WeirFoulds LLP issued a proof of claim on behalf of certain individual WeirFoulds D&Os for “contribution and indemnity against each other, and against the former directors and officers of the predecessors of Northstar Inc., in respect of any liability that they may incur under the Future Director’s Order”.
The Directors’ Indemnity
As authorized by s. 11.51(1) of the CCAA, the Initial Order provided that the Applicants would indemnify the D&Os “against obligations and liabilities that they may incur as directors and officers of the CCAA entities after the commencement of the within proceedings [except where they were] incurred as a result of the director’s or officer’s gross negligence or wilful misconduct”.  The D&Os thus benefited from a Directors’ Charge in the sum of US$1.75 million, on the Applicants’ current and future assets, undertakings and properties.  Pursuant to the Initial Order, claims against the Directors’ Charge were fixed ahead of all security interests except those charges pertaining to administration, critical suppliers and the DIP lenders.
In rendering its decision, the Court articulated that the granting of a Directors’ Charge is discretionary and extraordinary in nature and should be applied restrictively as it alters the general priority regime affecting secured creditors. The purpose of a Directors’ Charge is to (1) keep the D&Os in place during the restructuring to avoid a potential destabilization of the business and (2) to enable the Applicants to benefit from having experienced D&Os on the board during the CCAA proceedings.  The scope of a charge granted for the benefit of D&Os however is limited in several ways: (i) a charge relating to director’s indemnification under section 11.51 of the CCAA is limited only to a director or officer (or chief restructuring officer) of the companies under CCAA protection, (ii) a directors’ charge will not be granted if it is for a purpose other than to indemnify D&Os against obligations and liabilities that they may incur as a director or an officer of the company after commencement of the CCAA proceedings and (iii) D&Os cannot be indemnified through a charge granted under section 11.51(1) of the CCAA if the obligation or liability is incurred through their own gross negligence or wilful misconduct.
In this case the Applicants’ basis for seeking a Directors’ Charge was to ensure the ongoing stability of the business during the CCAA period and, accordingly, they obtained a charge for specific obligations and liabilities including “unpaid wages, pension amounts, vacation pay, statutory employee deductions and HST”, totalling approximately CA$1.65 million.
The MOE and Weirfoulds LLP Claims Were Not Covered by the Indemnity
The Court articulated that a finding that the Claims were in fact claims for which the D&Os were entitled to be indemnified would wrongly and inequitably affect the priority of claims as between the MOE and the secured creditor. The MOE Claims were already previously determined in the CCAA proceedings of the Applicants to be unsecured and subordinate to those of the secured creditor and the Court reasoned that it would be inappropriate if the MOE could, in the CCAA proceedings, improve its unsecured position against the secured creditor based on an environmental condition which occurred long before commencement of the CCAA proceedings.  The Court held that the MOE was not permitted to achieve indirectly in the CCAA proceedings what it could not achieve directly. While the MOE may have a claim against the D&Os, their claim was not properly constituted as a claim with recourse against the Directors’ Charge in the CCAA proceedings.
The views and opinions expressed herein are exclusively the personal views of the guest contributors only, unless otherwise attributed.  Information and opinions expressed herein do not necessarily represent the views of Weil, its attorneys, or its clients. Please see the complete Disclaimer for additional terms and conditions of use of this blog.