The SCC held that the Wise brothers, as directors of the subsidiary Peoples Department Stores, had not breached the duties they owed to the corporation as directors because their efforts to correct the financial problems were honest and in good faith. Furthermore, the court held that the directors did not owe a fiduciary duty to creditors.

The SCC in Peoples ruled that corporate directors “owe a duty of care to creditors, but that duty does not rise to a fiduciary duty” and that the “statutory fiduciary duty requires directors and officers to act honestly and in good faith vis-à -vis the corporation.”

Similarly, the Supreme Court in BCE held that directors have a fiduciary duty to the corporation “and only to the corporation.” Where the interests of the corporation and particular stakeholders do not coincide, “it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.”

BCE confirmed that Canadian corporate law in this regard is distinct and different than the shareholder-focused approach followed in the “Revlon line” of cases in the United States. In Canada, “there is no principle that one set of interests — for example the interests of shareholders — should prevail over another set of interests.” Fiduciary law promotes action involving integrity and fairness and protection of the vulnerable. The corporation, vulnerable because it can only act through its directors, is protected by a statutory fiduciary duty imposed on directors requiring them to act in its best interests.

Other stakeholders are not similarly vulnerable, and have access to other remedial processes like derivative actions or claims of oppression. Accordingly, the stakeholders of a corporation, including shareholders, creditors, and holders of debentures, are not afforded the same level of protection as the corporation itself. That is not to say that directors can ignore the interests of corporate stakeholders.

The SCC stated that, “one would expect the directors, acting in the best interests of the corporation, to consider their short- and long-term interests in the course of making their ultimate decision.”

Put another way, “the question is whether, in all the circumstances, the directors acted in the best interests of the corporation, having regard to all relevant considerations, including, but not confined to, the need to treat affected stakeholders in a fair manner, commensurate with the corporation’s duties as a responsible corporate citizen.”

BCE is also important as the SCC confirmed the application of the business judgment rule, which “accords deference from the courts to a business decision, so long as it lies within a range of reasonable alternatives.

“It reflects the reality that directors, who are mandated under the CBCA to manage the corporation’s business and affairs, are often better suited to determine what is in the best interests of the corporation.”

Business decisions need not be perfect, but must be reasonable and “provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board’s determination.”

Furthermore, the business judgment rule “applies to decisions on stakeholders’ interests, as much as other directorial decisions.”

It is often thought that directors owe a fiduciary duty to the corporation and its shareholders. In most instances that conclusion is harmless since what is good for the corporation is often good for the shareholders and other corporate stakeholders.

However, at all times, including on the eve of bankruptcy or insolvency proceedings, a plan of arrangement or other fundamental event that may cause the interests of the corporation and its stakeholders to conflict, directors of Canadian corporations have a fiduciary duty to the corporation, and only the corporation.

Graham King is a partner at Borden Ladner Gervais LLP. Nick G. Pasquino is a student-at-law in the Toronto office of Borden Ladner Gervais LLP.