Lexpert Special Editions

12 | Directors and Insolvency Another risk to officers and directors is increasingly tough environmental legislation and enforcement in most provinces, Conklin says. In the recent insolvency and final bankruptcy of Milton, Ontario-based Northstar Aerospace Canada, the allocation of all assets to pay creditor claims left board members holding the bag for environmental monitoring costs on polluted Northstar land estimated at $1.4 million per year, plus some $15 million in remediation costs. As in most cases, Northstar's D&O coverage excluded environmental liabilities, Conklin says. Worse, while Northstar was under CCAA protection, that court ruled D&O indemnities for environmental costs could not be given priority over claims of secured creditors. In the absence of company assets to meet its claim, the Ontario Ministry of the Environment (MOE) filed a D&O remediation order last year. Officers and directors appealed the remediation order to the Ontario Environmental Review Tribunal (ERT) and also asked the ERT for a stay of monitoring activities – and costs – during their appeal. While ERT stayed the $15-million remediation claim during the appeal, it said on November 12, Sophie James/shutterstock.com 2012, that it did not have authority to stay environmental monitoring and associated costs of $1.4 million per year. That decision was upheld June 19, 2013, by the Ontario Divisional Court, leaving directors liable to pay the running tab for monitoring, at least until the ERT renders a decision on the entire remediation order. Directors and officers are also exposed if they fail to protect company interests properly, as required under the CBCA, Conklin says. Board members can attract lawsuits launched by the company itself, or by its shareholders, and the fraught nature of insolvencies may make such actions more likely. In such cases, insurers will routinely reject claims for coverage of board members' defence costs, since actions by the company or its shareholders necessarily imply wrongful acts by the board. While settlements of shareholder suits from corporate indemnities is disallowed, there's a presumption in Canada that indemnities should at least pay advances on board members' defence costs, since these can be clawed back where director malfeasance is found at trial. But Conklin cautions that advances aren't guaranteed. Even where sufficient cash remains, the CBCA provides that advance funding of legal costs can be denied if there's a strong prima facie case that board members acted in bad faith. In Look Communications, the board sought CCAA protection for the ailing company and sold off primary assets to other telecom companies for $64 million in 2009. But then the board authorized payments of nearly $20 million – or some 30 per cent of assets – to themselves through the exercise of equity appreciation rights, based on a share valuation at twice the going market price. "That valuation was never disclosed" and total payouts to directors weren't revealed to shareholders until six months after the fact, Conklin says. Shareholders LEXPERT®Ranked Lawyers Chua, Chia-yi Conte, Silvana Côté, AdE, Suzanne Couzin, Robert McCarthy Tétrault LLP Osler, Hoskin & Harcourt LLP Osler, Hoskin & Harcourt LLP Couzin Taylor LLP (514) 904-8170 sconte@osler.com (514) 904-8180 scote@osler.com (416) 601-7715 cchua@mccarthy.ca Mr. Chua leads McCarthy's tax litigation and tax disputes group. Given his experience as a former Crown counsel, his biggest "wins" involve structuring meaningful, effective and creative out-ofcourt settlements for corporate taxpayers. Ms. Conte's trial and appellate practice in civil and commercial litigation focuses on class actions, product liability, banking, consumer protection and franchising law. Ms. Côté's corporate/ commercial litigation practice embraces banking, insolvency, contract, shareholders' disputes, competition, real estate, commercial leasing, product liability and class actions. She appears before all Québec courts and the SCC. (416) 943-3603 robert.couzin@ca.ey.com Counsel and founding partner. Broad practice including corporate and international tax planning and advisory mandates as well as tax controversy and litigation. Listed in Chambers Global and other guides to leading tax practitioners. Cowper, QC, D. Geoffrey Creber, Anthony (Tony) George Fasken Martineau DuMoulin LLP Gowling Lafleur Henderson LLP (604) 631-3185 gcowper@fasken.com (613) 786-0140 anthony.creber@ gowlings.com Mr. Cowper, Senior Counsel & Leader of the firm's Litigation & Dispute Resolution Group, has a broad hearing and appeal practice including private and public law, corporate/ commercial disputes, class actions, domestic and international arbitrations. Mr. Creber is a leading IP litigator who focuses on chemical, biological and pharmaceutical patents. He appears regularly before the Federal Courts and the SCC including the leading decision on novelty and obviousness (Plavix).

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