This article has been contributed to the blog by Steven Golick and Martino Calvaruso. Steven Golick is a partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP, and Martino Calvaruso is an associate in the group.
Allen-Vanguard Corporation (“AVC”) filed for protection from its creditors pursuant to the Companies’ Creditors Arrangement Act (the “CCAA”) on December 9, 2009. AVC’s filing was a “pre-packaged” application and included a plan of compromise or arrangement (the “Plan”) whereby AVC’s secured creditors agreed to restructure their secured indebtedness to permit a going concern sale of AVC’s assets. A meeting of AVC’s creditors was also held on December 9, 2009 and the Plan was approved by 100% of the affected creditors.
In Re Allen-Vanguard Corp., the former directors and officers (the “Directors and Officers”) of AVC brought a motion before the Honourable Justice Campbell of the Ontario Superior Court of Justice (Commercial List) (the “Court”) to enforce certain terms of the sanction order (the “Sanction Order”) granted in AVC’s CCAA proceedings. In particular, the Directors and Officers sought confirmation from the Court that the terms of the Sanction Order released the Directors and Officers from all claims, except for those specifically provided for under Section 5.1(2) of the CCAA and that the actions did not fall within the exemption contained in Section 5.1(2) of the CCAA.
Potential claims resulting from two class actions were of specific importance to the Directors and Officers.
The first class action, which was filed prior to the commencement of AVC’s proceedings under the CCAA (the “Laneville Action”), alleged that the Directors and Officers and AVC failed to properly value and account in AVC’s financial statements for AVC’s acquisition in 2007 of all of the shares of a private corporation.  In essence it was alleged that they failed to enter into a provident transaction and that this was a misrepresentation which caused a reduction in shareholder value. The Laneville Action claimed that the Directors and Officers were liable for various misrepresentations, negligence and oppression, and sought damages for negligent misrepresentation under the common law and the Ontario Securities Act.
The second class action, commenced after the Sanction Order was made (collectively with the Laneville Action, the “Class Actions”), asserted negligence against the Directors and Officers, amongst others, for failure to properly disclose the 2007 acquisition transaction in the financial statements of AVC.
The issue before the Court was whether the claims against the directors in the Class Actions fell within the scope of Section 5.1(2) and accordingly could not be released in any event.  If not, was the language of the release in the Sanction Order broad enough to encompass these claims.
The Court began by interpreting Section 5.1 of the CCAA. The Court noted that Section 5.1(1) addresses “obligations of the company where the directors are by law liable in their capacity as directors for the payment of such obligations”, while Section 5.1(2) provides for exceptions to the claims that can be released pursuant to Section 5.1(1).
The Court reviewed the language of the releases in the Sanction Order, and determined that the only claims that were not released were claims that fell within the scope of Section 5.1(2) of the CCAA.  The Court then interpreted Section 5.1(2).
The Court found it noteworthy that Section 5.1(2) refers only to claims against directors of a debtor and not its officers or the debtor company itself. Thus, claims against officers can be released in a plan.
In addition, the Court noted that Section 5.1(2) only refers to the claims of the debtor’s creditors (which the Court stated that in this context could include shareholders).  However, the Court interpreted Section 5.1(2) as being limited to situations where a director takes on a direct obligation to make a payment that would otherwise be an obligation of the company, and either promises to do so or is obliged by legislation, which in most cases is a post filing obligation.  In other words, a promise by a director to a creditor directly made post filing should not be released by a plan or sanction order.
With respect to the director releases provided for by the Sanction Order (and the Plan), the Court indicated that “third-party releases in particular should be the exception rather than the rule”. The Court reasoned that although such releases are not appropriate in all cases, such as where they are not integral or necessary to the restructuring, they are appropriate in the circumstances of this case.
It was also of interest to the Court that while counsel for the Class Actions had sought an adjournment of the vote on the Plan at the meeting of creditors to negotiate the terms of the release in the Plan, this adjournment was not granted, the Plan was approved by the creditors, and no creditor opposed the sanction of the Plan by the Court.  There was no evidence put before the Court as to what if any had been negotiated with respect thereto in the period between the creditors meeting and the sanction hearing. The Court was of the view that the claimants “took their chances” that, after the fact, the impugned language in the Sanction Order would allow their claims to be permitted.
The Court was critical of the proposition that an oppression remedy by a group of shareholders could be maintained in the circumstances of this case, since the expectation of such shareholders with respect to the 2007 acquisition should not have been different from the creditors of AVC.  In this case, AVC and the officers were released by the creditors in the Sanction Order.
The Court concluded that it would be inconsistent with the scheme of the CCAA to allow oppression claims of shareholders to proceed against a debtor’s directors as a result of acts or omissions by such directors prior to the CCAA filing.
On the other hand, personal undertakings or obligations of directors made after the CCAA filing should not be easily released.
The Court therefore granted the motion of the Directors and Officers and found that the releases in the Sanction Order released them from the Class Action claims against them and that the Class Action claims were not sustainable as against the directors under s. 5.1(2) of the CCAA.
Allen-Vanguard is a noteworthy decision because it provides useful insights as to the views of the Court in respect of Section 5.1 of the CCAA and the scope of the releases provided to directors in CCAA proceedings. It also provides an analysis of a director’s liabilities for oppression in the context of the CCAA.  Directors should take comfort in the decision, as the Court appears to have read Section 5.1(2) narrowly and thereby limited the exceptions to the claims that can be released pursuant to Section 5.1(1) and the Court limited the exposure of directors for oppression claims in the CCAA context.  It will be interesting to observe how future decisions of the Court apply the ruling in Allen-Vanguard and whether director releases are now openly challenged with more frequency at sanction hearings or otherwise prior to their confirmation.

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