Claims Against Directors, Auditors Cannot Be Dealt With in Liquidation
In Koroluk v. KPMG Inc., 2022 SKCA 57 (“Koroluk”), the Saskatchewan Court of Appeal recently held that claims against the directors and auditors of a corporation that may result in a claim over against the corporation cannot be stayed and determined in the liquidation of the corporation under The Business Corporations Act (Saskatchewan) (the “SBCA”).
Given the similarities in the applicable language in the SBCA, the Canada Business Corporations Act (the “CBCA”) and the corporate statutes in British Columbia and Alberta, the decision may impact the usefulness of liquidations in these jurisdictions in circumstances where the corporation is involved in litigation against third parties that have claims over for contribution and indemnity against the corporation. Due to subtle differences between the SBCA and the Ontario corporate statute, it is unclear whether a similar restriction would apply to Ontario corporations.
Liquidations Under Corporate Statutes
Corporate statutes provide a procedure whereby a solvent corporation may liquidate its assets, determine the liabilities that it owes, pay all of those liabilities and then distribute the remainder to its shareholders. A corporation may voluntarily commence liquidation with the approval of its shareholders or may be put into liquidation by court order if it thinks fit. A liquidator is appointed to carry out this process.
PrimeWest Mortgage Investment Corporation (“PrimeWest”) was a publicly-traded commercial and residential mortgage investor. In 2016, PrimeWest ousted its CEO and subsequently discovered that many of its loans were undersecured and its financial statements significantly overvalued the business. In 2018, a class action was commenced against the directors of PrimeWest and its auditors (the “Class Action”). While PrimeWest itself was not included as a defendant, the directors and auditors had potential claims for contribution and indemnity against it. PrimeWest pursued a sale of its assets in 2018 and 2019 without success.
PrimeWest decided to proceed with a voluntary liquidation and dissolution under the SBCA. The liquidation plan developed by PrimeWest contemplated that the liquidator would establish a claims process to identify and resolve “Claims” against PrimeWest. The definition of “Claims” included claims against PrimeWest and its directors, including claims for contribution and indemnity.
The liquidation plan was approved by the shareholders of PrimeWest in September 2019 and the Saskatchewan Court of Queen’s Bench (the “Chambers Judge”) in October 2019. The approval order initially contained (i) a declaration that the definition of “Claim” included the Class Action, and (ii) a stay of proceedings that included claims against directors. The representative plaintiff in the Class Action objected to these terms and they were removed from the order on consent.
On January 10, 2020, the Chambers Judge approved a claims process which included the same definition of “Claim”. The liquidator notified the representative plaintiff in the Class Action in January 2020 that it was a potential creditor of PrimeWest and needed to file a claim before the bar date. The plaintiff brought an application for a declaration that the Class Action was excluded from the liquidation proceedings. The liquidator brought a cross-motion for a declaration that the Class Action was a Claim that was subject to the claims process.
Motions Decision: Class Action Could Be Swept In
The Chambers Judge held that the class action fell within the definition of Claim in the liquidation plan and the claims process and the “liquidation order would be meaningless as far as determining the issues necessary for the winding up of PrimeWest if it could be held up until final adjudication on the class action.” The class plaintiff appealed.
Court of Appeal: Class Action Could Not Be Swept In
The Saskatchewan Court of Appeal overturned the decision unanimously and held that a court supervising the voluntary liquidation proceedings of a corporation cannot grant relief with respect to claims against third parties, even if they may result in a claim over against the corporation.
The Court of Appeal noted that the SBCA contained a very general grant of jurisdiction to a court supervising a liquidation to “make any order it thinks fit.” However, the orders must be made “in connection with the… liquidation and dissolution of a corporation.” The Court of Appeal noted that the SBCA provided in various locations that liquidations involved the identification and satisfaction of claims against the corporation (not third parties). For example:
- Section 210(e) provides that the court may “determine the validity of any claims made against the corporation.”
- Section 215(1)(g) authorizes the liquidator to “settle or compromise any claims by or against the corporation.”
The Court of Appeal reasoned that since liquidations were solely concerned with claims against the corporation, the determination of claims against third parties such as the directors and auditor of PrimeWest could not be characterized as being in connection with the liquidation:
… It is my conclusion that the general ability given to the court to make any order it thinks fit should not be interpreted as conferring upon the court the power to order that a claim against a person be proven in the liquidation simply because the defendant to that claim happens to have a right to seek contribution or indemnity from the corporation in liquidation.
The Court of Appeal gave a nod to the practical consequence of its decision: given the claims for contribution and indemnity that the directors and auditors had against PrimeWest, the liquidation proceedings could not be concluded until the class action has been dealt with, which may result in significant delay. The Court of Appeal simply noted that “… while delay is not to be encouraged, nor is it ideal, it is a possibility that the legislation contemplates.”
Takeaways: Impact on Usefulness of Liquidation in Certain Jurisdictions
The decision in Koroluk may result in voluntary liquidations under corporate statutes being less useful in circumstances where the corporation is involved in litigation against third parties that have claims over for contribution and indemnity against the corporation. In a liquidation and dissolution, distributions can only be made to shareholders of a corporation once all of its liabilities have been paid in full. In these circumstances, shareholders will be forced to wait for the class action to be resolved, a process that may take years.
Claims against directors, auditors and other third parties that may have claims over against the corporation are routinely stayed and dealt with in claims procedures under the Companies’ Creditors Arrangement Act, which generally facilitates a more expeditious determination of these claims.
Notably, the provisions in the SBCA that formed the basis of the Court of Appeal’s interpretation are substantively identical to those in the Canada Business Corporations Act and the Alberta Business Corporations Act. The comparable provisions in the British Columbia Business Corporations Act also solely focus on claims against the company. It remains to be seen whether courts applying these statutes will reach the same interpretation as the Court of Appeal in Koroluk. Certainly, Koroluk will be a persuasive authority in these jurisdictions.
Interestingly, due to a subtle difference between the SBCA and the Ontario Business Corporations Act (the “OBCA”), it is unclear whether an Ontario court would consider itself similarly constrained. While the OBCA is also primarily concerned with claims against the corporation, it contains one provision which grants the liquidator the power to make compromises with a creditor that has a claim “against the corporation or whereby the corporation may be rendered liable.” It would be difficult for an Ontario court to square that provision with an interpretation that a claim against a third party cannot be part of a liquidation.
 KPMG Inc. v. Koroluk (7 July 2020) Saskatoon, QBG 1455 of 2019 at para. 44.
 The Business Corporations Act, RSS 1978, c. B-10 (“SBCA”), s. 204(8).
 See also SBCA, ss. 204(7)(c), 210(h), 210(g), 215(1)(b).
 See e.g. Canada Business Corporations Act, RSC 1985, c. C-44, ss. 222(1)(b), 222(1)(g),
 See e.g. Business Corporations Act, RSA 2000, c. B-9, ss. 223(1)(b), 223(1)(g).
 See e.g. Business Corporations Act, SBC 2002, c. 57, ss. 325(1)(h), 325(1)(m), 330(2), 334(1)(c)(vii).
 Business Corporations Act, RSO 1990, c. B.16, s. 202.
Saskatchewan Court of Appeal directors liquidation Business Corporations Act