Risk managers with Canadian operations need to check expanded D&O liability

Risk managers with operations in Canada need to take note of a number of amendments to the nation’s Bankruptcy and Insolvency Act (BIA), which mean directors face expanded liability for transactions they carry out before a company is declared bankrupt, according to a Canadian legal expert. Nedko Petkov, partner in the litigation/dispute resolution group at leading commercial Canadian law firm Dale & Lessmann, recently wrote a note that warns directors and their risk managers to be aware that the 1 November introduction of a number of amendments to the BIA changes their risk profile. “One notable change is the broadening of the scope of directors' liability with respect to certain pre-bankruptcy transactions,” he pointed out. Mr Petkov explained that, previously, under Section 101 of the act, directors faced potential liability in connection with the payment of dividends – other than stock dividends, and the redemption or purchase for cancellation of the corporation's shares by a bankrupt corporation. But this only applied if a transaction took place within the year prior to bankruptcy and either at a time when the corporation was insolvent or the transaction rendered the corporation insolvent. Under the previous version of the BIA, directors were able to raise a due diligence defence by showing that the corporation was neither insolvent at the time of the transaction nor rendered insolvent by it, and that they had reasonable grounds to believe that to be the case, explained the lawyer. The recent amendments change the rules of the game and risk managers with any multinational that arranges insurance coverage for directors and managers of their Canadian operations need to take a look. “The recent amendments expand the scope of liability such that directors are now potentially liable in the event that, within the one-year period prior to bankruptcy, the corporation pays termination or severance pay or incentive or other benefits to any officer, director, or other person who manages or supervises the management of the corporation's business,” explained Mr Petkov. “As was previously the case, for directors to be liable in respect of such transactions, they must have (a) occurred either at a time at which the corporation was insolvent, or (b) rendered the corporation insolvent. Additionally, the payments in question must be conspicuously over fair market value and be made outside the ordinary course of business,” he continued. Mr Petkov pointed out that, while the due diligence defence remains available to directors, the BIA continues to put the onus on proving: first, that the corporation was solvent at the time of the transaction and remained so after it; and second, that the directors had “reasonable grounds” to believe that this was the case, on the directors themselves. “It remains to be seen how trustees and courts will interpret this new provision, but, it clearly calls for an added degree of caution on the part of directors of companies in challenging financial straits,” concludes Mr Petkov.

Risk managers with Canadian operations need to check expanded D&O liability

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