Understanding Insolvency and D&O Liability Outside the United States

Understanding Insolvency and D&O Liability Outside the United States: An Introduction

Edited by Perry s. Granof and Shirley Spira Perry S. Granof is the managing director at Granof International Group LLC in Chicago, Illinois, and of counsel to Williams Kastner in Seattle, Washington. He can be reached at [email protected]. Shirley Spira is an associate in the Law Offices of Todd McCauley, LLC, in New York City. She can be reached at [email protected]. This article is an abridgement of a compilation of analyses that originally appeared in the Spring 2009 and Winter 2010 issues of the TIPS International Committee Newsletter, www.abanet.org/tips/international/home.html. The following authors contributed to the original materials: Riccardo Buizza (Italy); Annemieke Hendrikse (The Netherlands); Oliver Sieg and Corinne Seidel (Germany); Sylvain Rieuneau (France); Reg Graycar, Peter Harkin, and Perry Granof (Australia); Francis Kean and Roderic McLauchlan (England and Wales); and Mary Margaret Fox (Canada). Granof and Spira wish to acknowledge their outstanding contributions. Note that the English and Welsh portion of this material is an abridged version of an article published in the Spring 2009 issue of Barlow, Lyde & Gilbert’s Officers’ Liability Review and is reprinted with permission of the authors.

U.S. firms that operate outside of the United States can and often do encounter adverse economic conditions in foreign lands, as well as the vagaries of unfamiliar cultural and economic norms of those lands. Such firms have established foreign subsidiaries or have entered into joint ventures to introduce popular U.S. products into foreign markets only to discover that what sells in the United States does not necessarily do so abroad, or does not do so adequately enough to justify a foreign venture. Hence foreign affiliates have been rendered insolvent and the very existence of U.S. parent companies has been similarly threatened. In such instances, the directors and officers affiliated with these foreign subsidiaries and joint ventures can and have incurred liability as a result of insolvencies. In the text below, a panel of author- experts offers brief analyses of the potential liability that might face directors and officers of insolvent corporations in Italy, the Netherlands, France, Germany, England and Wales, and Canada. These contributions are not exhaustive; they tend to focus on certain key features of the insolvency laws in their given jurisdictions and the impact of these features on directors’ and officers’ (D&O) liability.

Italy: How D&O Liability Works The word “bankruptcy” derives from the Italian word “bancarotta,” which means “broken desk.” This was the typical sanction applied in medieval Italy to bankrupt tradesmen or bankers. During the 1220s and 1240s, the Italian city-states of Siena and Vercelli already had bankruptcy laws providing for a collective recovery of debts directed by public officials. These laws were very harsh and called for criminal sanctions because they specifically aimed to punish insolvent debtors. Over the years, much has changed. The current Italian bankruptcy law was introduced in 1942 and remained unaltered until 2007, when it was reformed rather radically. While the earlier regime mostly provided for a process based on judicial liquidations, the 2007 reforms introduced a number of alternatives that aim at preserving a company’s business. Understanding the bankruptcy basics. All companies that have their principal place of business or a registered office in Italy are subject to Italian bankruptcy law. Bankruptcy proceedings are usually complex and may well last several years. The proceedings generally proceed in the following manner:

• a creditor (or several creditors), the debtor itself, or the public prosecutor files a bankruptcy petition; • the court issues the bankruptcy declaration order (sentenza dichiarativa di fallimento) and appoints a bankruptcy receiver (curatore fallimentare); • the receiver prepares the creditors’ list and rank order (verifica dello stato passivo); • the receiver liquidates the debtor’s assets; and • the proceeds of the bankruptcy estate, if any, are distributed to the creditors.

After declaring bankruptcy, the debtor cannot continue trading unless the court expressly authorizes it for a limited period of time. The bankruptcy declaration immediately suspends payment of all debts and liabilities. Any legal actions brought by creditors are stayed, and some payments made, securities given, or transactions entered into by the debtor within the so-called “suspect period” (i.e., before the declaration of

Published in The Brief, Volume 40, Number 2, Winter 2011. © 2011 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. insolvency) are subject to claw-back actions. The court-appointed receiver has the power to collect assets, bring legal actions in relation to the debtor’s claims, and otherwise manage the debtor’s assets. Only the court where the registered office of the company (or its principal place of business) is located has the power to issue an insolvency order, and the same court has exclusive jurisdiction for any action brought by or against the bankrupt company. To avoid the risk of forum shopping, any change of the place of business made by a debtor within the year before its filing of the bankruptcy petition is overridden when determining the competent court. Also note that the statute of limitations for an action is five years. D&O liability. Under Italian law, the directors and officers of a company can be (1) the members of a company’s board of directors or the sole director; (2) the members of the board of internal auditors; (3) the company’s general manager; or (4) the liquidator(s) if, before the bankruptcy, the company underwent a voluntary winding-up proceeding. If a company is in good standing, the company itself, its creditors, or its shareholders may initiate the liability action against the directors and officers. However, shareholders in Italy very seldom bring D&O liability actions. When a company declares bankruptcy, both the company’s and the creditors’ causes of action pass automatically into the hands of the court-appointed bankruptcy receiver, which is entitled to bring suit upon the prior approval of the court supervising the bankruptcy. Any proceeds that result from the liability action(s) brought by the receiver go into the bankrupt estate and must be used to pay off the company’s creditors. Recently, the criteria used to quantify damages in D&O bankruptcy liability actions have changed to some degree. In the past, courts simply quantified the damages by calculating the difference between the assets and the liabilities of the company at the time of the bankruptcy declaration. This approach is starting to be abandoned in favor of a precise quantification of the damages resulting from the specific violation(s) of the directors’ and officers’ duties. In the Italian legal system, pretrial discovery does not exist, and oral arguments play a minor role. Typically, a trial starts with the plaintiff serving a summons upon the defendants. It continues with an exchange of written briefs among the parties, with the court holding short hearings approximately every six months. After the initial hearing, the subsequent hearings are dedicated to the discussion and possible admission of interim measures and of the means of evidence submitted by the parties, and to the hearing of witnesses and experts, until the court finds the case ready for judgment. In bankruptcy claims, which typically involve complex accounting issues, the court usually appoints an accounting expert to carry out a court-supervised audit. The parties may employ their own experts, who contribute their valuations to the audit, and the parties may likewise file briefs. The initial trial takes place before a tribunal—that is, a court of first instance—and usually lasts two to three years. The tribunal’s judgment can be appealed before the court of appeal, which is by no means bound by the tribunal’s decision. The appeal procedure may also last several years. Any final appeal that is made to the Italian Supreme Court (Corte di Cassazione) can only address legal issues. Bankruptcy fraud (bancarotta fraudolenta) is the major bankruptcy-related crime under Italian law. It is defined as “diversion, concealment, dissimulation, destruction or dissipation” of the company’s assets, and/or the registration or the recognition of nonexistent liabilities for the purpose of harming creditors. Bankruptcy fraud can also be perpetrated by (1) removing, destroying, or falsifying a company’s books for the purpose of obtaining an undue profit or of harming creditors or (2) keeping the company’s books in such a way that identifying the corporate assets is impossible. The penalty for this crime is three to ten years’ imprisonment. Another type of fraudulent bankruptcy is called preferential bankruptcy (bancarotta preferenziale), which forbids creating fictitious priority claims. The penalty for preferential bankruptcy is one to five years’ imprisonment.

The Netherlands: Obvious Mismanagement Ceteco N.V., a Dutch holding company of an international concern, went bankrupt in May 2000. Its activities included the production and wholesaling of audiovisual equipment and large household appliances, as well as retail and consumer finance. Ceteco focused strongly on the Latin American market. Between 1991 and 1996, it implemented an ambitious growth model for its retail activities by selling its products to financially weak consumers (i.e., persons) on credit. During 1993, an accelerated growth plan was implemented and Ceteco gained access to five new markets by acquiring local companies. Ceteco’s trustees brought claims against the managing and supervisory directors, among others. In December 2007, the District Court of Utrecht honored the trustees’ claims to a large extent. The directors

Published in The Brief, Volume 40, Number 2, Winter 2011. © 2011 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. were held liable for the deficit in the bankruptcy, which was assessed in separate proceedings, and were ordered to make an advance payment in the amount of €50 million. This decision was then appealed. The judgment has been criticized, in short, as being tainted by the court’s bias in light of hindsight. However, recently a settlement was reached and the appeal proceedings withdrawn. In the Netherlands, trustees make most claims against managing and supervisory directors of limited liability companies in bankruptcy. This is largely due to the specific statutory ground for personal liability of directors, which can only be invoked by trustees, as delineated in Section 2:138 of the Dutch Civil Code for public companies and Section 2:248 of the Dutch Civil Code for private companies. Dutch trustees often use the threat of directors’ liability, on the basis of these provisions, to increase an estate’s assets, in particular if covered by D&O liability insurance. Both Sections 2:138 and 2:248 stipulate that, in the event of bankruptcy of a company, each of its directors severally shall be liable for the amount of debts remaining unpaid after realization of the company’s assets if the directors have discharged their duties in an obviously improper manner and prima facie evidence shows that this has been a major cause of the company’s bankruptcy. This risk of liability applies to bona fide directors acting negligently as well as directors who act in bad faith. The “obvious mismanagement” language of the code should be read to signify a grave mistake that exceeds the free margin of entrepreneurial risk. This concept is construed relatively broadly. Although trustees are faced with a double burden of proof in showing obvious mismanagement and its being a major cause of the company’s bankruptcy, both sections of the Dutch Civil Code also provide for two assumptions of proof. First, in the event of inadequate compliance with account keeping or publication obligations of the annual accounts, there is an irrefutable conclusion that the directors and officers improperly discharged their duties. Second, in such a case, the obvious mismanagement is deemed to be a major cause of the company going bankrupt. In such a situation, directors and officers can only escape liability if they persuasively argue that other facts and circumstances were important causes of the bankruptcy, for example, a “credit crunch.” Yet, if the court establishes obvious mismanagement on the basis of Section 2:138 or 2:248, the directors are jointly and severally liable for the whole deficit of the estate. Furthermore, a previous discharge will not bar any claims of the trustees on this ground. The harsh consequences of liability on the basis of these provisions are mitigated by their application only to mismanagement in the period of three years before the bankruptcy and the possibility of exoneration if an individual director proves that he or she is not to blame for the improper discharge of duties and has not been negligent in taking measures to avert the consequences thereof. In addition, these provisions have the power to mitigate the amount of money the directors are liable to pay. Sections 2:138 and 2:248 apply to managing directors as well as supervisory directors (i.e., nonexecutive directors) and so-called “shadow” directors. Shadow directors are persons who have determined the company’s policy as if they were directors. In the Ceteco case, the trustees only invoked the applicability of the assumptions of proof explained above in a late stage of the proceedings. The district court believed, however, that the trustees had sufficiently proven that obvious improper management had been a major cause of the bankruptcy. According to the court, this improper management consisted of the continuation of the accelerated growth model even when the directors knew that this involved the risk of overextension and knew, or should have known, that this risk materialized, causing the company to spiral out of control. Timely measures could have prevented the company from having to file for bankruptcy. Shortly after this judgment, and while the directors appealed, the trustees tried to obtain a garnishment order to attach the D&O liability insurance. Both the directors and officers and the D&O liability insurers argued against that attachment. In particular, they argued against an attachment in connection with any claims for the compensation of defense costs as this could effectively bar the directors and officers from putting up a proper defense, which would harm the interests of both the directors and officers and the insurer. For this reason, the district court refused to grant leave for the attachment, although it recognized that the trustees had an interest in protecting their means of recovery. The appeal court came to the opposite conclusion, mainly because it assumed that the directors and officers could pay for their defense costs themselves and would do so, having regard to their obligation vis-à-vis the D&O liability insurer to defend themselves against claims. Accordingly, this court rejected the argument of the directors and officers and the insurer that the attachment on defense costs would violate the nemo plus principle, as it would not place the trustees as garnishor in a better position vis-à-vis the D&O liability insurer than the directors and officers as insureds. It also rejected the argument that the attachment would violate the non peius principle because it would not harm the D&O liability insurer.

Germany: Tortious Wrongdoing In 2004, about 40,000 corporate insolvencies were registered in Germany. By 2008, in the wake of Germany’s economic boom, insolvencies had decreased to around 30,000. Yet as the global credit crunch increases insolvency risks, so will concomitant personal exposures on the part of corporate directors. A preliminary summary of those exposures is offered below. In the classic German scenario, a company becomes insolvent because of illiquidity or overindebtedness. Consequently, it is unable to repay its creditors. Creditors are unlikely to recover the full amount of their unsecured claims against the insolvent corporation; as a result, their incentive to file personal claims in tort or negligence against the company’s managing directors increases. The insolvency administrator, whose role resembles that of a trustee in the United States, is charged with increasing the amount of insolvency assets in order to increase the funds available for the creditors. One way of increasing the assets is to prove that a managing director tortiously or negligently caused the company’s assets to diminish. As a general rule, German liability statutes provide that only a company, not its managing directors, can be held liable for a wrongful act. However, in some cases the managing directors can be held directly liable to the insolvent company itself. For example, when a major publicly listed German corporation became insolvent in 2001, the insolvency administrator filed a claim against its managing directors for damages in the amount of approximately €2 million. The claim was based on the allegation that the managing directors had granted loans without sufficient solvency checks and collateral. The court sustained the action, and the managing directors were held liable to indemnify the corporation for the resulting damages. A managing director can also be held liable in tort under Section 15a of the German Insolvency Code (Insolvenzordnung) if he or she is proven to have delayed in filing the corporate bankruptcy petition. This is referred to as obstruction of bankruptcy. The managing director who is found to have obstructed the bankruptcy is held personally liable for any payments made despite the insolvency and for any damages arising from the belated filing of the petition. Thus the claimant in these cases can either be the creditors of the insolvent company or the insolvent company itself. Although managing directors face great risks of personal liability in corporate insolvencies, the claimants bear the risk that they will be unable to recover from a managing director if he or she becomes insolvent. Hence, claimants are encouraged to file when they know that the corporation has a policy with a solvent D&O carrier.

France: Clarifying D&O Liability A French corporation’s de jure managers are its general manager and members of the board of directors, including the permanent representative of any director that is a legal entity. It is also worth noting that some French corporations have adopted a German-style corporate management structure, which is composed of a management board that manages the company under the eye of a supervisory board. In this model, only the members of the management board are managers (dirigeants) of the corporation. A de facto manager may, for example, be a majority shareholder or parent company, or possibly a creditor, such as a bank, that is directly involved in the day-to-day operation of the company. The French notion of management fault is very broad. In practice, virtually any conduct that caused a corporate loss is likely to be qualified as such in retrospect. Typical instances of management fault include failure by directors to exercise adequate control over the chief executive officer, including their failure to attend board meetings (in a March 30, 2010, decision that was widely reported, the French Supreme Court laid down the principle that each director is presumed liable for wrongful decisions made by the board unless the director shows evidence that he or she actively objected to that decision); permitting a company that chronically operates at a loss to continue doing business; and failure of the chief executive officer to file for bankruptcy within the period of time prescribed by law. (This time frame is currently 45 days from the date when the corporation becomes unable to meet its due and payable debts with its available cash.) Managerial responsibility to cover the bankrupt corporation’s deficiency of assets departs significantly from ordinary principles of French liability law. In fact, its application is left, to a very large extent, to the discretion of the bankruptcy courts, which

1. using the company’s assets as his or her own; 2. carrying out business in his or her personal interest under the guise of the corporation; 3. using the corporation’s assets or credit to achieve a personal interest, or to promote a third-party entity or business in which the defendant holds a direct or indirect interest; 4. abusively maintaining, for his or her own benefit, a chronically loss-making operation that could only end in the corporation’s insolvency; and 5. concealing some of the corporation’s assets or fraudulently increasing its liabilities.

When the French legislature enacted this article, which went into effect on January 1, 2006, it clearly intended to create a new kind of civil sanction. However, Presidential Ordinance No. 2008-1345 of December 18, 2008, which was effective on February 15, 2009, repealed Article L. 652-1. As a result, the only pecuniary liability that a director or officer may now incur in a bankruptcy context is the liability to pay for the corporation’s insufficiency of assets under Article L. 651-2, the wording of which was adjusted by Ordinance No. 2008-1345. In particular, Article L. 651-2 was expanded to provide that the defendant may not participate in the distributions of liquidation proceeds, up to the amount he or she is ordered to pay, where at the same time he or she is a creditor of the bankrupt corporation. This ordinance brought a welcome clarification to French bankruptcy law on D&O exposure, although liability to cover the corporation’s insufficiency of assets remains potentially severe and unpredictable.

Australia: Insolvent Trading Under Section 588G of Australia’s Corporations Act of 2001 and other key statutory provisions, a director of a company is under a duty to prevent the company from trading when it is insolvent. Failure to do so will give rise to possible civil penalties and civil claims by liquidators against directors and others who took part in the company’s management, including shadow directors. The liquidator is entitled to seek recovery on behalf of the creditors for the losses sustained while the company traded when insolvent. This provision arose out of concern for the welfare of creditors that are otherwise subject to the limited liability protections of a corporation at a time when the prospects of a company incurring a loss to its creditors has become real, as pointed out in Woodgate v. Davis, a 2002 case. A number of elements go into establishing liability for

England and Wales: Important Concerns for Directors The trigger point for an investigation under the Insolvency Act of 1986 is the point at which a company is placed into any form of administration or liquidation. As soon as that occurs, the officeholder—be he or she administrator, administrative receiver, provisional liquidator, or liquidator—is immediately vested with powers of investigation under Sections 235 and 236 of the Act. Under Section 235, an officeholder is empowered to obtain information from directors and employees over the last 12 months of trading as to the “promotion, formation, business dealings, affairs, or property of the company . . . .” The only limitation on these powers is that the information has to be “reasonably required.” In practice, however, since on the day of appointment the information base on which the officeholder will be operating is likely to be low, the extent of the information he or she is likely to reasonably require will be correspondingly high. The scope for refusing to cooperate with an officeholder pursuing inquiries under Section 235 is thus severely limited. Requests for information need not be limited to providing documentation. Requests can, and frequently do, extend to the requirement to attend meetings with the officeholder to answer questions. Although the procedure is supposed to be informal, lawyers can be present, and the atmosphere, nature, and tone of the investigation can seem anything but informal. It should be remembered that, although the primary responsibility of an officeholder is the collection and realization of a company’s assets and the settlement of its liabilities, there is also an obligation on all officeholders to report to the Secretary of State if it appears that there has been any malfeasance on the part of the directors such as, for instance, a breach of the Company Directors Disqualification Act of 1986. Officeholders have even wider powers of investigation under Section 236 of the Insolvency Act that extend to any persons who are in possession of company property or to anyone else at the discretion of the court. Section 236 requires a formal application to the court, and if an order is made, a director may be required to give a sworn statement and be subject to cross-examination. The order is at the discretion of the court, and the judge is required to balance the need for information with a requirement to not be “unduly oppressive.”

Published in The Brief, Volume 40, Number 2, Winter 2011. © 2011 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. Learning the terminology. In the current economic climate, the threat of company insolvency occupies many executives’ thoughts. Yet, for many, insolvency is uncharted territory, complete with its own jargon and procedures, which are briefly introduced below. The insolvency legislation—primarily the Insolvency Act of 1986, as amended by the Insolvency Act of 2000 and the Enterprise Act of 2002, and supplemented by the Insolvency Rules of 1986—does not define the word “insolvency.” A company can be considered insolvent based on either of two tests: (1) the cash flow test, where the company cannot pay its debts as they fall due, or (2) the balance sheet test, where the company’s total liabilities (including contingent and prospective liabilities, such as guarantees) exceed its realizable assets. A company might pass the cash flow test yet be insolvent under the balance sheet test, or vice versa. The various insolvency procedures have different features. Which one is chosen, or imposed, will largely depend on the prospects for rescuing the company. Administration may be initiated by the company, the holder of a “qualifying floating charge,” or by the court, normally on the application of a creditor. A statutory moratorium applies, preventing creditors from enforcing security without the consent of the administrator. No proceedings—legal or insolvency—can be commenced. This approach was designed to enable a company to be rescued from insolvency. However, in practice a company is likely to be liquidated or dissolved following an administration. Receivership is commenced by a secured lender applying to the court to enforce its security either over specific property subject to a fixed charge or over all the company’s assets under a floating charge. However, the latter is generally no longer possible if the charge was created after September 15, 2003, and instead lenders holding a security over all of the company’s assets under a floating charge may generally appoint administrators out of court. Under a company voluntary arrangement, the debtor company and its creditors come to an agreement regarding payment of the company’s debts, which is implemented and supervised by an insolvency practitioner. This is a “rescue.” “Prepack” is a term used to describe a sale of business put together between the management of the company, its proposed administrators, and a buyer before the company enters administration, where the sale is completed by the administrator who has been appointed, thereby rescuing part of the business. Finally, liquidation—sometimes referred to as winding up—is generally commenced to close a company and distribute its assets among creditors. A company may voluntarily initiate the liquidation, either because it is insolvent (termed “creditors’ voluntary liquidation”) or because its purpose has come to an end (termed “members’ voluntary liquidation”). In both cases, the shareholders place the company into liquidation, but in the case of a creditors’ voluntary liquidation, the creditors vote on the liquidator’s appointment. A creditor of a company can also petition the court for the company’s winding up if it is insolvent. This is known as compulsory liquidation. Directors in the twilight zone. The period between the point when there is no real prospect of avoiding insolvent liquidation and commencing one of the insolvency procedures is often referred to as the “twilight zone.” During this period, directors and officers must be especially aware of how the company’s uncertain solvency can affect their duties. Normally, directors’ duties are owed to the company, that is, the shareholders as a whole. However, once a company has entered the twilight zone, directors are under a legal duty to concentrate on protecting the interests of the creditors rather than those of the shareholders. Section 172(3) of the Companies Act of 2006 states that the duty to “promote the success of the company” is subordinated to any enactment or rule of law requiring directors to consider or act in the interests of creditors of the company. By way of illustration, directors should avoid allowing the company to incur further losses or greater liabilities (such as loans), even though shareholders might wish to try and trade out of financial difficulties. Similarly, directors should also take care to avoid disposing of company property at less than its market value or preferring one creditor unfairly over another. The insolvency practitioner overseeing the administration or liquidation will carefully scrutinize directors’ conduct during this period. The insolvency practitioner is legally obliged to investigate the directors’ conduct in the run-up to the insolvency procedure and to report to the Department for Business, Innovation and Skills. Breaches of duty will expose directors to statutory remedies under insolvency and company legislation, such as wrongful trading and malfeasance. Furthermore, the court can set aside or vary transactions that were entered into up to two years before the commencement of the liquidation or administration if they were undervalued or involved preferences. Such proceedings may result in directors facing personal liability and even disqualification. A director’s personal lack of awareness of the company’s pending insolvency is no defense. The test for liability under wrongful trading, for example, is what is referred to as a “subjective/objective” test. This means the director will be judged both according to the standards of what a

Canada: The Oppression Remedy While the Supreme Court of Canada’s 2004 decision in Peoples Department Store (Trustee of) v. Wise has effectively shut the door on any suggestion that directors of insolvent corporations in Canada (or corporations approaching insolvency) owe a fiduciary duty to creditors, the case law by no means extinguishes a creditor’s ability to pursue recovery against those directors through an alternative, and some would argue much broader, remedy known as the “oppression remedy.” Although first introduced in Canada in the business corporations’ legislation of a single province in 1960, the oppression remedy did not receive much attention until it was included in the federal business corporations’ statute, the Canada Business Corporations Act, in 1975. Today, the business corporations’ statutes of all but two provinces, Quebec and Prince Edward Island, provide for the oppression remedy. In a nutshell, and restricting this discussion to creditors’ remedies against directors personally as distinct from against their corporations, Section 241 of the Canada Business Corporations Act provides that, “[i]f, on an application [by a ‘complainant’] the court is satisfied that in respect of a corporation or any of its affiliates:

(a) any act or omission of the corporation or any of its affiliates effects a result, (b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or (c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of.”

Any number of a wide range of remedies—interim or final—may be made, including an order “compensating an aggrieved person.” One should note that, at the time of its introduction into Canadian corporate statutes, the oppression remedy was viewed as a remedy primarily available to shareholders and, for the most part, shareholders of privately held corporations. In practice, however, that restriction has not held true. The oppression remedy has become a predictable component to most actions instituted in Canada against corporations and their directors and officers in an ever-widening circle of circumstances. Indeed, in all but a very few cases, it has displaced the derivative action as the most effective vehicle by which a complainant may seek redress against alleged corporate and/or management wrongdoing. Canadian courts have decided several issues significant to creditors regarding the oppression remedy. Specifically, courts have determined that

• although debt actions should not routinely be converted to oppression actions, a creditor may be granted status as a complainant for purposes of advancing an oppression remedy; • a trustee in a bankruptcy (or, it would seem, a liquidator or receiver) may be granted status as a complainant to bring a claim for oppression against the former directors of an insolvent corporation; • a contingent creditor—that is, one whose claim against the directors had not yet crystallized at the time of the allegedly oppressive conduct—may also qualify as a complainant; and • a finding of oppression can be made, and relief for oppression granted, even in the absence of intent or lack of probity on the part of the director whose conduct is at issue.

In its most recent decision analyzing the scope and application of the oppression remedy, BCE Inc. v. 1976 Debenture Holders, the Supreme Court of Canada emphasized that

• oppression is an equitable remedy: “It seeks to ensure fairness—what is ‘just and equitable.’ It gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair . . . . It follows that courts considering claims for oppression should look at business realities, not merely narrow legalities . . . .” • oppression is fact-specific: “What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another.”

From the Supreme Court’s decision in BCE, two things are clear. The first is that in assessing whether oppression has occurred in any such claim, a court will examine carefully the reasonableness of a complainant’s expectations in light of the corporation’s published statements, documents, and all of the circumstances. The second is that if the directors have, on the evidence, properly considered the relevant factors and interests before making a decision or taking a particular action, a court will be loath to second- guess them, as the business judgment rule is alive and well in Canada. The recent amendments to Canadian securities legislation, incorporating civil liability for secondary market disclosure, will also likely lessen the number of oppression claims. Given the state of the economy and the recent failure of a number of previously successful Canadian corporations, however, there is every reason to believe that further jurisprudence on this unique remedy will be forthcoming.

Conclusion The brief summaries contained in this article do not constitute legal advice and cannot capture the full range of remedies available to stakeholders against directors and officers worldwide. However, these synopses do provide a glimpse into the perils that await U.S. citizens and corporations and their D&O insurers when they venture abroad. Perhaps the best advice to those brave enough to extend their operations to foreign shores is to become fully informed on local law concerning fiduciary responsibilities and to retain local corporate counsel familiar with ways of limiting the exposures of directors and officers to those laws.