Deepening Insolvency in Canada?

Abstract

The Canadian legal landscape on corporate directors' liability has been quiet since the release of the Supreme Court of Canada's landmark decision in Peoples Department Stores Inc. (Trustee of) v. Wise. In Peoples, the Court decided against imposing a duty on directors to consider the interests of creditors when carrying out their fiduciary duties to a corporation approaching insolvency. It appears, however, that an American doctrine that holds directors and related third parties liable for 'deepening the insolvency' of the corporation when its life has been wrongfully prolonged, and one that is on the radar in Canada, has the potential to affect the way Canadian courts view director liability. Peoples may have closed the door to imposing director duties to creditors but the American doctrine of 'deepening insolvency', if adopted in Canada, has the potential to do an end run around Peoples by indirectly providing protection for creditors when the corporation is facing insolvency. The author discusses the implications of adopting the deepening insolvency doctrine in Canada and concludes that the doctrine is not necessary, as Canadian business law already has several functionally equivalent or similar remedies to address the harms deepening insolvency seeks to overcome. Most importantly, the oppression remedy, a doctrine deemed by the Supreme Court of Canada to deal with situations of near insolvency, could be expanded to address the concerns of creditors. Other potential avenues include claims for breach of fiduciary duties and duties of care, as well as claims for negligent or fraudulent misrepresentation.

Keywords: Bankruptcy, creditors' interests, directors' duties, deepening insolvency, director liability, oppression remedy, fiduciary duty, duty of care, negligent misrepresentation, fraudulent misrepresentation, business judgment rule