The decision appears to fly in the face of Canadian law but may still be influential
Although the landmark decision of The Supreme Court of the United Kingdom in BTI 2014 LLC v. Sequana SA appears to fly in the face of Canadian law, directors may still feel its impact on the exercise of their fiduciary duty as it relates to creditors.
“Canadian law is very clear that there is no point at which directors can disregard the best interests of the company as a whole in favour of creditors, but BTI says this can happen when a company faces ‘imminent insolvency,’” says Preet Gill, a complex legal issues and opinions partner who focuses on debt restructurings in Bennett Jones LLP’s Toronto office.
The majority in BTI held that the creditor duty arises when directors know or ought to know that the company is insolvent or bordering on insolvency or that an insolvent liquidation is probable. Once the duty is engaged, the court held that directors should balance creditors’ interests against those of shareholders where they conflict. When insolvency is inevitable, however, creditors’ interests become “paramount.”
The seminal statements on directors’ duties to creditors in Canada come from our Supreme Court’s 2004 decision in Peoples Department Store Inc. (Trustee of) v. Wise and its 2008 judgment in BCE Inc. v. 1976 Debentureholders.
“At all times, directors and officers owe their fiduciary obligation to the corporation,” the Peoples’ court wrote. “The interests of the corporation are not to be confused with the interests of the creditors or those of any other stakeholders.”
Aaron Emes, a Toronto partner and head of opinions and research at Torys LLP in Toronto, says BTI clearly conflicts with Canadian law.
“The SCC has been clear that directors owe their fiduciary duty to the company – even when the company is close to insolvency.”
But this does not mean that directors may not consider stakeholders' interests, including creditors, in exercising their fiduciary duty.
“The Supreme Court in BCE rejected the idea that directors have an obligation to promote stakeholder welfare, but confirmed that directors have the discretion to consider stakeholders,” wrote Edward Iacobucci, former dean of the University of Toronto Faculty of Law and a corporate law professor.
Here, it’s significant that the UK Companies Act imposes a duty on directors to consider or act in the interests of company creditors in certain circumstances.
When the SCC decided Peoples and BCE, this obligation did not exist under the Canada Business Corporations Act. But in 2019, Parliament amended the CBCA to include the interests of various stakeholders, including creditors, when directors were “acting with a view to the best interests of the corporation.”
“We interpret that to give directors wide discretion to do what’s in the best interest of a company,” Emes says. “But that doesn’t prevent directors, when exercising their fiduciary duty, from putting creditors last in the exercise of their business judgment.”
According to Emes, BTI will not have much bearing on Canadian law: “The difference between the reasoning in BTI and Peoples is a substantive difference.”
For her part, Preet agrees that BTI may not influence a shift in Canadian law regarding the substance of directors’ duties.
“The BTI court considered the Canadian jurisprudence and stated that the UK had gone in a different direction than Canadian law, where directors owe a duty to the corporation as a whole.”
Still, Preet believes that BTI’s discussion of the various stages at which the creditor's duty arises and increases in significance may be a starting point for Canadian courts struggling to determine whether directors exercised their discretion properly in the face of insolvency.
Peoples, she notes, referred to the “vicinity of insolvency” but did not define it and suggested that it was “incapable of definition” and “has no legal meaning” other than “to convey . . . a deterioration in the corporation’s financial stability.”
“BTI, on the other hand, provides what I call a ‘sliding scale’ for determining when directors' duties change from balancing creditors’ interests against those of other stakeholders to treating creditors’ interests as paramount. And that may prove useful if and when our courts have to decide whether directors exercised their discretion regarding creditors appropriately. There may be more sensitivity to this issue given the increasing number of insolvencies we’re seeing as a result of the pandemic and the current economic climate.”