Lexpert Special Editions

8 | Directors and Insolvency comforting when directors sign on, often become worthless when the company is insolvent and under protection of the Companies' Creditors Arrangement Act (CCAA). Sino-Forest serves as a reminder that when shareholders sue auditors, underwriters or directors, they're essentially seeking access to corporate indemnities — but indemnities are company assets on which secured creditors hold first call. Shareholder suits are viewed as equity claims and thus an attempt to end-run the legally prescribed priority of secured creditors. In such cases, CCAA courts routinely deny auditors, underwriters and directors access to indemnities for the purposes of settlements with shareholders. This can leave directors of insolvent companies to fall back on D&O (directors' and officers') insurance policies purchased by the company to protect its board members against liabilities incurred in the course of their duties. "It's important that officers or directors have an appreciation of the amount of insurance that's available, the retention limit under the policy, the relationship to indemnities and other key terms under the policy, including exclusions," Conklin says. The second major bit of bad news is that A+B+C=X, according to Gary Luftspring with Ricketts, Harris LLP in Toronto. Typical D&O insurance policies, Luftspring says, contain a Side A, covering directors for costs of defending legal actions and paying any judgments or settlements; a Side B, reimbursing the company for Side A expenses (basically the deductible or "retention amount" on the policy); and possibly, a Side C, insuring the company itself against costs of defence and any judgments or settlements. The insurance policy is usually written to total up all those costs and pay them as they're incurred — until a policy maximum, call it X, is reached. X is a very finite number and after that directors are on their own, he says. D&O insurance is a capped and declining pool of funds. As a result, outside directors, who are often sued after the company and its officers, may well find their insurance, like their indemnity, provides very little real protection. "I always recommend that [outside directors] look at buying their own policy, as a backup," Luftspring says. In cases where the company is cross-listed in the US, "I think you would be foolish not to have that kind of coverage." For best protection, he says companypurchased D&O coverage should give precedence to Side A claims; should be non-rescindable, in the event officers authorize questionable financial statements; and should not contain exclusions for tax liabilities, since directors are strictly liable for employee income tax withholdings. In cases where the company won't extend insurance to cover these items, directors should seek to cover them off with personal insurance, Luftspring says. Defence costs alone can rapidly chew through large amounts of money, especially where the company and each of its officers and directors is represented by separate counsel in more than one action, Conklin says. Where the company is cross-listed in Canada and the US, as was the case for Hollinger and Nortel, directors can be caught in a "perfect storm" of civil and criminal actions in two countries and forced to cover multiple large legal bills from their personal savings, in hopes of fending off even larger judgments for which insurance coverage is already long exhausted. When big Canadian companies become insolvent, or hopefully before it gets that bad, they typically file for protection of the CCAA, Depression-era legislation that aims to restructure and refloat the insolvent company, forestalling the financial and social chaos of a major bankruptcy. CCAA protection freezes all creditor actions against the debtor LEXPERT®Ranked Lawyers Callaghan, John E. Cameron, Donald M. Campbell, A. Neil Campbell, Nigel Campion, John A. Capern, Gordon D. Gowling Lafleur Henderson LLP Bereskin & Parr LLP McMillan LLP (416) 957-1171 dcameron@bereskinparr.com (416) 865-7025 neil.campbell@mcmillan.ca Blake, Cassels & Graydon LLP Fasken Martineau DuMoulin LLP Paliare Roland Rosenberg Rothstein LLP (416) 863-2429 nigel.campbell@blakes.com (416) 865-4357 jcampion@fasken.com Mr. Cameron's practice focuses on intellectual property litigation, particularly relating to patent, trade-mark, copyright, trade secrets law and technology licences, as well as trade-mark prosecution. Dr. Campbell focuses on competition, trade and energy law. He acts in cartel, abuse of dominance & merger cases, as well as foreign investment reviews and anti-dumping and other trade issues. He is past Chair of the Ontario electricity market monitor. Mr. Campbell practises securities and corporate commercial litigation, and administrative law. He has a national capital markets and broker law practice in the courts and before all securities regulators. Mr. Campion's trial and appeal practice has produced over 200 reported decisions from courts including the SCC, tribunals and arbitrations. His experience embraces class action, corporate/ commercial, mining, competition and securities cases. (416) 646-4311 gordon.capern@ paliareroland.com (416) 369-6693 john.callaghan@ gowlings.com Mr. Callaghan has a broad practice, including civil litigation, commercial litigation and regulatory offence work. He specializes in complex cases, including class actions. He appears before all levels of courts and arbitration tribunals. Mr. Capern advises clients in the resolution of disputes in many areas of corporate and commercial activity, mergers and acquisitions, liability of professional advisors, shareholder and partnership disputes, director & officer and employee litigation.

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