Introduced in 2009, the Quebec Business Corporations Act (CQLR c S-31.1) (hereinafter “QBCA“) provides that a corporation must indemnify its directors and officers for all reasonable costs and expenses incurred as a result of legal proceedings.
The Law and the Minister’s Comments
Section 159 QBCA reads as follows [1]:
159. Subject to section 160, a corporation must indemnify its directors and officers or their predecessors, its other mandataries, and any other person who, at its request, holds or has held similar office in another entity, for all reasonable costs and expenses incurred in the performance of their duties, including amounts paid to settle an action or execute a judgment, or incurred as a result of an investigation or proceedings in which they were involved, to the extent that:
1° the person acted with honesty and loyalty in the interest of the corporation or, as the case may be, in the interest of the entity in which the person held office as director or officer or acted in that capacity at the request of the corporation;
2° in the case of proceedings resulting in the payment of a fine, the person had reasonable grounds to believe that their conduct was in compliance with the law.
The corporation must also advance to such persons the amounts necessary to cover the costs of their participation in proceedings referred to in the first paragraph and the related expenses.
Business Corporations Act, CQLR c S-31.1, s. 159.
According to the comments of the Minister of Justice, section 159 QBCA creates an obligation for the corporation to indemnify its directors when they are involved in civil, penal, or administrative proceedings [2]:
This provision introduces a statutory obligation for the corporation to indemnify its directors, officers or their predecessors, its other mandataries, and any other person who, at its request, has held similar office in another entity, for all costs and expenses incurred as a result of an investigation or the filing of civil, penal, or administrative proceedings in which such persons are involved when they:
– acted with honesty and loyalty in the interest of the corporation;
– had, in the case of penal proceedings resulting in the payment of a fine, reasonable grounds to believe that their conduct was in compliance with the law.
The corporation must also advance to such persons the amounts necessary to cover the costs related to their participation in any proceedings involving them.
Explanations and Comments to Parliamentarians on the Business Corporations Act Bill, document from the Ministry of Finance for the detailed study of Bill 63 presented to the National Assembly on October 7, 2009.
Application of the Indemnification Obligation
More than ten years later, it is surprising to note that section 159 QBCA is rarely invoked in court. Indeed, only three (3) decisions are listed in the Canadian Legal Information Institute (CanLII)[3].
One of these decisions is the recent case Craig Packaging Ltd. v. Beaumont, 2020 QCCS 367 (CanLII), where the Hon. Justice Barin discusses the application of section 159 QBCA to an oppression case against a corporation and one of its directors.
Indemnification During Legal Proceedings
Relying on the Supreme Court of Canada decision in Blair v. Consolidated Enfield Corp.[4] , the Court concludes that the director or officer seeking indemnification pursuant to section 159 QBCA is presumed to be acting in good faith and that it is up to the opposing party to prove otherwise [5]:
[171] In my first decision delivered orally on 9 May 2019 and transcribed on 10 June 2019, I concluded that the bylaws of Montcorr dated 26 July 2014, which were likely prepared with the participation and input of Craig Packaging, in paragraph 184 under the heading “Indemnification”, permit the payment by Montcorr of Beaumont’s legal fees until a final adjudication of this matter.
[172] At that time, I noted that section 159 of the Act favoured such an approach. […]
[173] I also noted that the language in paragraph 185 of Montcorr’s bylaw were mandatory – in other words, the corporation was obliged to advance the moneys in question with the caveat that if a court or competent authority subsequently concluded that the person had committed an intentional or gross fault, the person would, according to paragraph 186, have to repay Montcorr all monies advanced.
[174] Finally, in May of 2019, I noted that case law appeared to support such a conclusion. In short, I indicated that while there did not appear to be any decisions under Quebec law that addressed the particular facts of this case – the situation where the director in question was also an employee of one of the shareholders of the corporation – in my view the general principles set out under article 159 of the Act were applicable.
[…]
[177] As the Supreme Court indicated, in the case of a director requiring an advance of moneys under a provision similar to the one in paragraph 185 of Montcorr’s bylaws, the “person” in question was assumed to be acting in good faith unless proven otherwise.
[178] In May of 2019, therefore, I decided to presume the good faith of Beaumont unless proven otherwise at trial.
Craig Packaging Ltd. v. Beaumont, 2020 QCCS 367 (CanLII)
As the Court mentions, an order prior to the final hearing had been issued to allow the director, in this case Mr. Beaumont, to be indemnified for his costs during the legal proceedings.
This decision confirms the position that directors and officers of a corporation need not bear the financial consequences of legal proceedings when they are sued personally in their capacity as director or officer. According to the aforementioned case law, the only exception to this principle would be a demonstration that the director or officer is acting in bad faith.
However, indemnification granted to directors and officers during legal proceedings is not final and may be reviewed in the final decision of the legal matter.
Review of Indemnification at Final Hearing
As the Court of Appeal stated in Eagan v. Ward, the judge who has the opportunity to hear the case in its entirety may review the decision rendered during the proceedings that granted or denied indemnification to a director or officer [6]:
[19] Indeed, it will always be possible for the judge to remedy the orders rendered in the final judgment, to the extent that the judge concludes that sections 159 and 160 QBCA apply or that the applicants have had the opportunity to demonstrate that, contrary to what the pleadings allege, they acted in the performance of their duties with honesty and loyalty in the interest of the corporations involved without committing any gross or intentional fault.
Eagan v. Ward, 2019 QCCA 1322 (CanLII)
This analysis by the Quebec Court of Appeal is consistent with section 160 QBCA, which stipulates that the director or officer must reimburse the corporation for any indemnification already paid pursuant to section 159 QBCA when the court determines that the conditions set out in paragraphs 1° and 2° of the first paragraph of section 159 are not met:
160. In the event that a court or any other competent authority determines that the conditions set out in paragraphs 1° and 2° of the first paragraph of section 159 are not met, the corporation may not indemnify such person and the person must reimburse the corporation for any indemnification already paid pursuant to that section.
Furthermore, the corporation may not indemnify a person referred to in section 159 when the court has found that the person committed a gross or intentional fault. Such person must then reimburse the corporation for any indemnification already paid, as the case may be.
Business Corporations Act (CQLR c S-31.1), s. 160
Moreover, and contrary to Justice Barin’s analysis regarding the application of section 159 QBCA during proceedings, the good faith of the director or officer is not determinative in the analysis of grounds for indemnification at final hearing. Indeed, even while acknowledging that the director had acted hastily, even cavalierly, the Court limited itself to analyzing whether he had acted “with honesty and loyalty in the interest of the corporation“, as stipulated in section 159 [7]:
[179] Having now heard the testimony of the principal witnesses and considered all of the evidence put before me, I am of the view that although Beaumont may have acted somewhat hastily and perhaps cavalierly, he did not in any way act dishonestly or disloyally towards Montcorr.
[180] In any event, no such demonstration was made before me on the balance of probabilities.
[181] As such, I do not see any reason for Beaumont to reimburse the legal defense costs that were paid on his behalf to defend a case that was particularly commenced against him to make a point.
Craig Packaging Ltd. v. Beaumont, 2020 QCCS 367 (CanLII)
Analysis
In our view, and with respect for the Court’s opinion, the courts should not apply double standards in analyzing the application of section 159 QBCA.
First, the imposition of an additional condition during proceedings was not intended by the legislature. On the contrary, the legislature deliberately excluded directors and officers who committed a gross or intentional fault in section 160 QBCA. Extending this exclusion to directors acting in bad faith appears manifestly contrary to legislative intent and contrary to the maxim “the legislature does not speak in vain“.
Second, the imposition of an additional condition in analyzing the application of section 159 QBCA appears to allow the Court to temporarily punish the director or officer it deems to be acting in bad faith. To illustrate this argument, consider the case of a person acting in bad faith who has not committed “a gross or intentional fault“[8]. According to the Court’s analysis in Craig [9], this person will be deprived of indemnification until a final judgment is rendered. In our view, the inclusion of bad faith analysis during proceedings allows the Court to punish a director or officer in the short term when the QBCA does not grant such powers.
In our opinion, the analysis during proceedings of indemnification for a director or officer should instead be guided by the criteria applicable to safeguard orders, such as urgency, prima facie right, and balance of inconvenience.
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[1] Business Corporations Act, CQLR c S-31.1, s. 159.
[2] Explanations and Comments to Parliamentarians on the Business Corporations Act Bill, document from the Ministry of Finance for the detailed study of Bill 63 presented to the National Assembly on October 7, 2009.
[3] Craig Packaging Ltd. v. Beaumont, 2020 QCCS 367 (CanLII), Eagan v. Ward, 2019 QCCA 1322 (CanLII) and Langlois v. Langlois, 2015 QCCS 4203 (CanLII)
[4] 1995 CanLII 76 (SCC), [1995] 4 SCR 5, at page 23.
[5] Craig Packaging Ltd. v. Beaumont, 2020 QCCS 367 (CanLII), paras. 170 to 178,
[6] Eagan v. Ward, 2019 QCCA 1322 (CanLII), para. 14.
[7] Craig Packaging Ltd. v. Beaumont, 2020 QCCS 367 (CanLII), paras. 179 to 181.
[8] Business Corporations Act (CQLR c S-31.1), s. 160.
[9] Craig Packaging Ltd. v. Beaumont, 2020 QCCS 367 (CanLII), paras. 170 to 178.
