The Supreme Court of Canada has clarified the criteria to be used when imposing personal liability upon directors for corporate oppression.

In the case of Wilson v Alharayeri, 2017 SCC 39, the Supreme Court of Canada affirms the decisions of the lower courts holding two directors personally liable to pay compensation to a minority shareholder in an oppression claim brought under section 241 of the Canada Business Corporations Act (“CBCA”).

The Wilson case involved a wireless technology company that issued a private placement of convertible notes which substantially diluted the proportion of common shares held by any shareholder who did not participate in it. Prior to the private placement, the company’s board of directors refused to convert into common shares the Class A and B convertible preferred shares held by a former director even though his shares were convertible based on the financial tests laid out in the company’s articles of incorporation and its audited financial statements. Yet the board accelerated the conversion of the Class C convertible preferred shares held by the company’s President despite doubts expressed by the auditors over whether the test to convert these shares into common shares had been met. The private placement substantially reduced the former director’s proportion of common shares and their value, causing him to initiate an oppression claim.

The trial judge held the President and the chair of the company’s audit committee, as the only two members of the audit committee, personally liable for the board’s refusal to convert the former director’s Class A and B convertible preferred shares into common shares, and for the failure to ensure that the rights of the former director as a shareholder were not prejudiced by the private placement. Both directors advocated before the board against the conversion of the former director’s shares. When the trial judge’s decision was upheld on appeal, the case went before the Supreme Court, which was essentially asked when personal liability for oppression may be imposed on corporate directors.

In confirming that section 241 of the CBCA gives a trial court broad discretion to make any interim or final order it thinks fit and enumerates specific examples of permissible orders, the Supreme Court held that some of the examples show that the oppression remedy contemplates liability not only for the company but also for other parties, although the CBCA’s wording goes no further to specify when it is fit to hold directors personally liable under the section.

The Supreme Court stated at least four general principles should guide courts in fashioning a fit remedy under section 241, and the question of director liability cannot be considered in isolation from them. These general principles are summarized by the Supreme Court [at para. 49 to 55] as follows:

First, the oppression remedy request must in itself be a fair way of dealing with the situation. … Where directors have derived a personal benefit, in the form of either an immediate financial advantage or increased control of the corporation, a personal order will tend to be a fair one. Similarly, where directors have breached a personal duty they owe as directors or misused a corporate power, it may be fair to impose personal liability. Where a remedy against the corporation would unduly prejudice other security holders, this too may militate in favour of personal liability. … But personal benefit and bad faith remain hallmarks of conduct properly attracting personal liability, and although the possibility of personal liability in the absence of both of these elements is not foreclosed, one of them will typically be present in cases in which it is fair and fit to hold a director personally liable for oppressive corporate conduct. … Where there is a personal benefit but no finding of bad faith, fairness may require an order to be fashioned by considering the amount of the personal benefit. In some cases, fairness may entail allocating responsibility partially to the corporation and partially to directors personally.

Second, as explained above, any order made under s. 241(3) should go no further than necessary to rectify the oppression…. This follows from s. 241’s remedial purpose insofar as it aims to correct the injustice between the parties.

Third, any order made under s. 241(3) may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders. … Accordingly, remedial orders under s. 241(3) may respond only to those expectations. They may not vindicate expectations arising merely by virtue of a familial or other personal relationship. And they may not serve a purely tactical purpose. In particular, a complainant should not be permitted to jump the creditors’ queue by seeking relief against a director personally. The scent of tactics may therefore be considered in determining whether or not it is appropriate to impose personal liability on a director under s. 241(3).

Fourth — and finally — a court should consider the general corporate law context in exercising its remedial discretion under s. 241(3). … Director liability cannot be a surrogate for other forms of statutory or common law relief, particularly where such other relief may be more fitting in the circumstances.

In applying these four general principles, the Supreme Court agreed with the trial judge in holding the two directors personally liable for the oppression. As the only members of the audit committee, they played the lead roles in board discussions resulting in the non-conversion of the prior director’s A and B shares, and were therefore implicated in the oppressive conduct. In addition, the President derived a personal benefit from the oppressive conduct since he increased his control over the company through the conversion of his C shares into common shares (which was not the case for the C shares held by others), allowing him to participate in the private placement despite issues as to whether the test for conversion had been met. This was done to the detriment of the former director, whose own stake in the company was diluted due to his inability to participate in the private placement. The remedy went no further than necessary to rectify the former director’s loss, as the amount awarded corresponded to the value of the common shares prior to the private placement, and vindicated his reasonable expectations that his A and B shares would be converted if the company met the applicable financial tests laid out in its articles and that the board would consider his rights in any transaction affecting his A and B shares.

In light of the foregoing, the Wilson case illustrates that directors may be held liable for acts of corporate oppression so long as the circumstances satisfy the above tests outlined by the Supreme Court. Any director who has acted in bad faith and has derived a personal benefit in connection with oppressive corporate conduct is likely to be personally liable for it.


Owners and managers of private companies are often faced with the challenge of re-opening negotiations which have stalled. Whether they are trying to complete a contract or transaction, or resolve an ongoing business dispute, their frustration with being unable to get a deal will likely lead to their search for ways to break the deadlock. While not every strategy or technique they might consider will be available to them, or will work if tried, there are at least a number to choose from. This blog post will explore the options.

It’s helpful for those owners and managers considering the options to first reflect upon the possible causes of the deadlock. If a conflict between the negotiating companies has escalated and become more difficult to resolve, has the group psychology changed? Since such negotiations are often conducted by their respective teams of company employees, have some members of each team become more competitive or dominant, or have members with more moderate views been pressured into more extreme positions, or have cohesiveness and solidarity become the team’s overriding goal?

Or has the individual psychology changed? Have individual members become more inclined to blame those on the other team, or even those on their own team? Have the members of both teams lost respect and empathy for the others, or concluded that the negotiation is necessarily a zero-sum game with no prospect for a “win-win” outcome?

While the psychology at play may seem to be an obstacle, the team members may eventually come to accept that continuing the conflict is more unpleasant than settling it, and that they should attempt to re-open the negotiations by using some of the methods described below.

One of the first avenues they might choose to explore is the appointment of an intermediary to intervene, preferably someone perceived by both sides as being impartial and objective, and perhaps regarded as wise, with at least some moral authority. Often used in dispute mediation prior to embarking on arbitration or litigation, such a “neutral” shuttles back and forth between the parties in search of a resolution, acting as a facilitator to encourage the parties to brainstorm and generate various problem-solving ideas. Even if the intermediary is not impartial when intervening and personally desires a certain negotiated result, his behind-the-scenes conversations may be enough to loosen hardened positions if he has the respect of both sides.

Another approach, somewhat related to the appointment of a neutral mediator and useful when the parties recognize the problem causing the deadlock, is the appointment of a team of experts who will study the problem and recommend ways of solving it. Providing a “cooling-off period” and allowing those involved in the negotiations to step aside for a while, the experts bring a fresh perspective and the potential to learn new information and come up with creative solutions. Even if the recommendations of the experts are eventually rejected by the negotiating parties, they will provide a focus for the re-opening of the negotiations with possibly different dynamics. Whether the expert teams consist of tax accountants, software programmers, environmental engineers, business valuators or other specialists, the compromise solution they arrive at may well be enough to get the negotiations back on track, especially if it is regarded as an objective, commonly held benchmark.

While engaging outsiders to come up with a solution to break a negotiation logjam may be an acceptable course to take for some negotiating parties, others will not want any third parties to be involved at all. Whether they are concerned about possible loss of privacy and confidentiality of their affairs or loss of control of the process, or they are afraid of having an imperfect solution imposed upon them, or are wary of the expense and delay incurred by involving an outsider to obtain an uncertain result, they may prefer to keep the negotiations to themselves and exercise more “self-help” in overcoming the deadlock.

Either side might then simply try to “break the ice” by engaging in acts of kindness or making polite gestures to the other side, perhaps by way of a small gift or an apology, indicating their willingness to the other side to be more co-operative. They might even admit that their communication style could be better.

Or if the other side does something helpful, they might express thanks or be helpful in return. This promotes repetition of co-operative acts, sending conciliatory signals without conveying any message of weakness.

Often negotiations can be re-opened by a proposal to discuss procedural matters or rules, such as suggesting a neutral location for a meeting, the agenda for such a meeting, the time limits for discussion, or the method for keeping records.

Following procedural suggestions with suggestions as to which issues should be given priority whenever the parties resume their discussion may provide an incentive to return to the negotiating table. While this option requires the parties to acknowledge their deadlock, it at least forces them to list the various issues from those most important to those least important from their perspective, and encourages them to return with their list of priorities in the hope that there might be enough trade-offs to eventually arrive at a bargain. Creating the list allows each party to clarify what it is asking for and why, and reminds each party that it will seldom achieve everything it wants and that it must give up a few things to be realistic.

If setting such priorities does not seem possible for the parties, they may instead be able to identify a few things they each have in common. Despite their many differences, they may both share a couple of overriding goals, or have a mutuality of interest in certain things, such as their reputation among customers and suppliers within their industry, or the need for them to work together in the future. Reminding each other of these may be sufficient to get the parties to resume their negotiations.

If finding something in common between them is difficult, it may still be possible for each party to generate one or more acceptable solutions as a means of indicating their flexibility in the process even though their original demand will remain entrenched and unsatisfied. For example, instead of continuing to insist upon a specific dollar amount, one of the parties might suggest a generally accepted range of dollar amounts appropriate for the issue being addressed.

One technique often used to restart negotiations is for one party to acknowledge the other’s interests, demonstrating that those interests have been heard. By listening and re-stating what the other party has said, a willingness to understand the other’s interests and feelings is indicated. Any ambiguity may be clarified as well.

When each party states its own interests, it allows that party to move off its initial, perhaps hardened, position so long as whatever solution the parties may arrive at, their solution will incorporate those interests. While one party may oppose the initial position taken by the other, it will be difficult to oppose the interests of the other. The parties may then be prepared to carry on with their negotiations by surrendering their initial positions without surrendering their interests.

For a party that has always insisted that its solution towards arriving at an agreement is the only solution, and that it will not unilaterally make any concessions, it is difficult to get that party to move off that position. It may be necessary for the other party to offer something in return, asking whether they have something of value they might exchange. This approach is often called “tit for tat” negotiating, or even “haggling”, although it not normally regarded as an acceptable alternative to other methods which reflect the view that negotiation is essentially an exercise in problem solving, or at least an exercise in focusing on party interests, not positions.

But the tit for tat method may work when other methods have failed in getting a party to budge from its initial position. When a conflict is quite entrenched or longstanding, a minor unilateral concession by one party may motivate a positive response from the other, possibly encouraging a series of small, trust-building exchanges. The smaller concessions may lead to concessions on the bigger issues so long as trust between the parties is maintained.

Depending upon the group psychology mentioned above, another strategy which a party may use to break the stalemate involves identifying the division within its own negotiating team between “hawks” and “doves” and the need to satisfy both of them before a solution can be proposed. That party may say that it has to please its whole team, including those who vehemently oppose giving up on the initial position, namely the hawks, as well as those who are prepared to explore a number of possible solutions, namely the doves. The intention here is to convey a message that the team is not being belligerent, but is just divided, and the other party should understand that division and help to jointly find a way to placate the hawks.

Sometimes the refusal of the parties to talk about solutions proposed in the past makes them more receptive to talk about other things, softening their resistance to further negotiations. By rejecting past proposals as being totally unacceptable and possibly inflammatory, they may then invite each other to search for answers among the alternative solutions which are available. While expressing their frustration caused by recycling rejected solutions, they display some flexibility towards generating new ideas.

While many of the foregoing techniques often succeed in breaking negotiation logjams, there are times when they fail, and tougher measures may have to be tried instead.

Sometimes it may be necessary for one of the parties to threaten unpleasant consequences for both parties in order to get them to work harder to find a solution. While this approach can make things worse if it simply repeats threats that have been made in the past, it can cause the parties to get serious if the threat is presented without hostility and expresses a concern of mutual harm that might be painful though not catastrophic. By suggesting that the harm is inevitable and systemic, rather than chosen and intended, it removes any inference that the threat is vindictive or malicious.

If threatening an undesirable consequence fails to get a reaction, it may be necessary to resort to litigation. Preparing and filing a claim with a court against a party refusing to negotiate tends to get the attention of the refusing party. Often the purpose of such an action is not to ultimately obtain a decision of the court but to impose a process upon the parties to deal with their differences.

The various procedures flowing from a court claim offer a number of advantages in getting the parties to engage each other. Ordinarily the imposition of specific deadlines for exchanging information is enough to get the parties to act. Having to complete court forms requiring clear statements of positions, alleged facts and evidence generally causes the parties to rethink the approach they have previously taken. The time, cost and inconvenience they will incur in following along the court mandated path may provide a sufficient deterrent from proceeding further and instill an earnest want to settle.

The relatively slow pace and inevitable delays frequently associated with court actions tend to provide the parties a significant cooling-off period and afford ample time to reflect upon the costs and benefits of proceeding. The rules of court procedure require a certain level of integrity and civility, and the involvement of lawyers can offer the parties a different perspective on how disputes can be resolved.

But resorting to litigation as a means of breaking a stalemate in negotiations can backfire. Filing and serving a claim can be interpreted as not just confrontational but the “last straw” in an already difficult relationship which quickly becomes poisonous, turning the parties into sworn enemies bent on destroying each other.

Although litigation may not have such dire consequences, there is always looming the ultimate deadline on the courtroom steps when the procrastination stops, the negotiations conclude, and the court then takes over in steering the parties. If the court takes an aggressive case management approach, the parties lose control over the timing of their negotiations and may find themselves facing an actual hearing. Their conflict is then resolved by a judge or other third party.

Given these negatives, each party is likely to regard litigation as a last resort, to be initiated only when all of the other strategies to remove the negotiation deadlock fail.

While there is no guarantee that the strategies discussed above will work in any particular situation to get disputing parties back to the negotiation table, they are at least worth trying, either alone or in combination, to motivate the parties to try again to find a solution.

But there will be times when the parties cannot find merit in completing their contract or transaction, or in resolving their differences, and it may be better for each of them to recognize their own opportunity costs and pursue other arrangements with the potential for even greater reward. They may have to admit that the time and emotional energy they have spent arguing with each other hasn’t been worth it and decide to just simply move on.

A guarantor of a company’s bank loan may still be liable to pay the full amount of the loan even though the company is not in default in making its loan payments.

The case of Toronto-Dominion Bank v. Konga, 2016 ONCA 976, should remind guarantors that they are liable to pay the full amount of a guaranteed loan upon any default in the terms of the loan, not just a default in the repayment terms.  

In Konga, a director of a company, who was also its majority shareholder and Chief Executive Officer, signed a personal guarantee of all of the company’s obligations to the bank. The bank was providing loans and credit facilities to the company under a loan agreement which linked the credit limit on the company’s line of credit to its accounts receivable up to a limit of $800,000. The company also had to maintain a tangible net worth of $1,250,000 at all times and to provide the bank with certain financial information on a regular basis. The loan agreement was subject to a facility letter which provided that the line of credit would be repayable on demand and that the bank could accelerate the payment of the loan upon the occurrence of any event of default. Events of default included the breach of any term or condition in the loan agreement where the breach was left unremedied for 5 business days.

After the bank issued a notice advising that the company was overdrawn on its line of credit and had been in breach of the tangible net worth requirement, the line of credit remained overdrawn and the company continued to fail to meet its tangible net worth requirement Following several more notices, the bank issued a formal demand for immediate repayment and a notice to enforce the company’s general security agreement, and demanded immediate repayment of the same amount from the director as guarantor. The company filed a notice of intention to make a proposal in bankruptcy. The bank then moved for summary judgment against the guarantor in the Ontario Superior Court of Justice, and the motion judge found that the company was in breach of the loan agreement by (i) being overdrawn on its line of credit; (ii) being in breach of the tangible net worth requirement; and (iii) not providing its accounts receivable listings.

When the guarantor appealed, the Ontario Court of Appeal upheld the motion judge’s interpretation of the guarantee and dismissed the appeal. It rejected the guarantor’s argument that a demand for payment pursuant to the guarantee was only available if the company had failed to make a payment, stating [at para. 20] as follows:

On the findings of the motion judge, the corporation repeatedly failed to meet its financial obligations under the loan agreement and, therefore, had defaulted on its monetary terms. The corporation had failed to stay within its borrowing limits, was repeatedly in excess of its line of credit limit, and was overdrawn every month between January and November of 2014, except for March and April. 

Furthermore, the Court of Appeal stressed [at para. 23] the motion judge’s finding that the guarantee “did not require the respondent [bank] to exhaust its recourse against the corporation, or any other security held by the bank in respect of the corporation’s indebtedness, before being entitled to make a demand under the guarantee”.

In rejecting the guarantor’s argument that the bank’s conduct entitled him to be discharged from his guarantee, the Court of Appeal held [at para. 27] as follows:

To obtain a discharge from the guarantee, the appellant had to establish that the respondent bank’s demand somehow caused the corporation’s default. It is clear on the findings of the motion judge that he did not accept that had occurred. On his findings, the bank played no role in the corporation’s excessive borrowings, its breach of the tangible net worth requirement, its refusal to submit its accounts receivable reports, and its continuing failures to cure its defaults despite the bank’s warnings.

In light of the foregoing, Konga provides a useful reminder that lenders are not necessarily required to exhaust their recourse against the primary debtor before looking to the guarantor when enforcing their loans, and that a guarantor should be prepared for a lender to call on the guarantee as soon as the debtor is in default. However, a guarantor should be aware that a court will consider whether the lender enforcing on the guarantee has caused the default of the debtor, although the guarantor will bear the burden of proving that the lender has acted improperly.

Removing a shareholder from shareholder register and ceasing to pay him dividends held not to be oppression despite lack of proper documentation and failure to comply with CBCA in transferring his shares.

The Supreme Court of Canada case of Mennillo v. Intramodal inc., 2016 SCC 51, provides some comfort to small, closely held companies that their failure to strictly comply with the technical formalities of corporate legislation will not necessarily establish oppression.

In Mennillo, two friends Mario Rosati and Johnny Mennillo created a road transportation company, as Rosati managed the company and Mennillo contributed money. They were the only shareholders and directors, with Rosati holding 51 shares and Mennillo holding 49 shares, although they rarely complied with the requirements of the CBCA and almost never put anything in writing. There was no shareholder agreement nor any written contract relating to Mennillo’s advances of money. When Mennillo later resigned in writing as a director and officer of the company, the company ceased to regard him as a shareholder and transferred his shares to Rosati, even though no share transfer form was signed, nor share certificate endorsed, by Mennillo.

When Mennillo brought an oppression claim against the company, the trial judge dismissed the claim, finding that Mennillo had undertaken to remain a shareholder only so long as he was willing to guarantee the company’s debts but later was no longer willing to do so or to be a shareholder. When the claim was also dismissed on appeal, Mennillo appealed to the Supreme Court of Canada. The Supreme Court held the oppression claim to be groundless, since Mennillo could have no reasonable expectation of being treated as a shareholder given the findings of the trial judge. It stated [at para. 5] that “all the corporation can be accused of is sloppy paperwork … but sloppy paperwork on its own does not constitute oppression”.

The Supreme Court [at para. 10] elaborated as follows:

According to the trial judge’s finding of fact, Mr. Mennillo agreed that he would remain a shareholder of the corporation on the condition that he guarantee its debts. He decided that he no longer wished to guarantee those debts and transferred his shares to Mr. Rosati. He could, therefore, have no reasonable expectation of being treated as a shareholder thereafter. He also could be thought to reasonably expect the corporation to ensure that the corporate formalities to register this arrangement would be observed. But the failure to do so (i.e. the conduct that “violated” those expectations) cannot be characterized as “oppressive, unfairly prejudicial or unfairly disregarding” of his interests. This was a two-person, private company in which the dealings between the parties were marked by extreme informality. As this Court said in BCE [Inc. v. 1976 Debentureholders], “[c]ourts may accord more latitude to the directors of a small, closely held corporation to deviate from the strict formalities than to the directors of a larger public company”. … In substance, Mr. Mennillo was not oppressed but treated as he wanted the corporation to treat him. The failure of the company’s lawyer to comply with the corporate law requirements to give effect to that intention is not oppression.

Although the Supreme Court did not find oppression despite certain corporate formalities being ignored, it did comment on the significance of those formalities. For example, it stated [at para. 63 and 64] that a share transfer cannot be retroactively cancelled by way of simple oral consent, as follows:

As Mr. Mennillo points out, an issuance of shares can be cancelled only if (a) the corporation’s articles are amended or (b) the corporation reaches an agreement to purchase the shares, which requires that the directors pass a resolution, that the shareholder in question gives his or her express consent and that the tests of solvency and liquidity be met. Can such an act by the corporation be valid even though these requirements of the CBCA have not been made? I do not think so. … The commentators agree that meeting the requirements with respect to the maintenance of share capital cannot be optional, given that it is the share capital that is the common pledge of the creditors and is the basis for their acceptance of doing business with the corporation.

Furthermore, the Supreme Court emphasized [at para. 71 to 73] the need for a security to be properly endorsed before its transfer may be registered by the issuing company, even though it declined to provide Mr. Mennillo with a remedy because he knew he had not endorsed his share certificate, as follows:

In this case, the requirements of s. 76(1)(a) [of the] CBCA are not fulfilled. It is common ground that the shares that were transferred were not endorsed by Mr. Mennillo. Therefore it is true that Intramodal proceeded to register a transfer that did not meet all of the criteria stated in the CBCA. But this is of no assistance to Mr. Mennillo under the circumstances. It is not as a result of an improper registration of this share transfer that Mr. Mennillo is no longer the holder of any shares in Intramodal. It is rather as a result of his transfer of these shares to Mr, Rosati, as found by the trial judge. … In that regard, the endorsement of the shares was required to complete the transfer itself between Mr. Mennillo and Mr. Rosati. It was required for the shares to be delivered, which, in turn, was necessary to complete the share transfer: ss. 60(1) and 65(3) [of the] CBCA. Since this was an important formality required by law, it was to be observed on pain of nullity of the transfer … With that being said, there is no doubt about the fact that Mr. Mennillo knew that this formality was not complied with when the company proceeded to register the transfer in the corporate books, some time in 2007. There is also no doubt that he was aware that he had not endorsed his share certificate when the shares were transferred to Mr. Rosati as the trial judge found.

In light of the Mennillo case, a party should not feel allowed to take advantage of mistakes, sloppy paperwork or non-compliance with corporate statutes under the oppression remedy if to do so would provide a benefit that could not reasonably be expected.

Yet non-compliance should not be condoned, and certainly not encouraged. A lesson learned in the Mennillo case is that the uncertainty and confusion resulting from technical non-compliance can result in years of expensive litigation that could be avoided by paying a bit more attention to the paperwork.

Even if a failure to comply with corporate law formalities may not give rise to an oppression remedy, a party may still obtain a remedy by way of pursuing claims for the rectification of records under section 243, or a compliance order under section 247, of the CBCA.

Company shares not held in trust by wives for husbands who transferred shares to their wives to avoid possible creditor claims.

The case of Gustafson v. Johnson, 131 O.R. (3d) 203, confirms that appropriate documentation can succeed in avoiding claims that shares are held in trust.

In Gustafson, the three original shareholders and directors of an engineering company transferred their shares to their wives to put the shares beyond the reach of their creditors. When an application was made for an order winding up the company, there was a dispute over who were the shareholders, since the answer would determine who would be entitled to the company’s assets upon the winding up.

Although it was claimed that the shares were held by the wives in trust, the Ontario Superior Court of Justice decided that neither the transfer documents nor the company’s shareholder register indicated that the shares were impressed with a trust, and the deeds of gift transferring the shares were not qualified in any way. Any presumption of resulting trust was rebutted with clear proof that the shares were a gift.

The specific documentation used to transfer the shares of one of the directors was described by the Court [at para. 15 to 18] as follows:

On December 1, 2003, [director] Allan Curle executed a document called “deed and declaration of gift”, transferring 25,000 [company] NGI shares to his wife, Juanita Curle. The deed of gift recites that the NGI shares were delivered in consideration of “natural love and affection” for his wife. … Thus, the shares were placed beyond the reach of Mr. Curle’s creditors. The deed of gift was duly signed by Allan Curle and witnessed. The gift was not qualified in any way. There was no indication that the shares were to be held in trust. On the same day, Juanita Curle acknowledged receipt of the shares by virtue of her signature on a document titled “acceptance and receipt of gift”. Her signature was witnessed. This document, drawn up by the corporate solicitor, did not indicate that she held the shares in trust. Further, on December 1, 2003, Messrs. Curle, Gustafson and Johnson, in their capacities as directors of NGI, passed a resolution approving the transfer of shares from Allan Curle to Juanita Curle. The shareholder register for NGI duly recorded the transfer of shares. Those documents do not show that the shares were impressed with a trust.

The same gifting mechanism was used for the other two wives. In finding that there was no evidence that the shares were impressed with a trust, either in the corporate records or elsewhere, the Court emphasized [at para. 48] that “it would have been an easy thing for the corporate solicitor to draw a deed of trust instead of a deed of gift, if he was so instructed, but he didn’t”.

The Court decided [at para. 54] that the legal presumption of a resulting trust that applies to gratuitous transfers was rebutted in this case as follows:

In order to answer the respondents’ submission that a resulting trust arises from the transfer of the Curle shares, the onus is on Ms. Curle to prove that the NGI shares were a gift. I find that she has done so by tendering the deed of gift given by Mr. Curle, together with the acknowledgment and receipt of gift that she signed. The documents provide clear and unambiguous proof that a gift was intended. Accordingly, Ms. Curle has rebutted the presumption of resulting trust by proof of gift. No resulting trust arises in respect of the NGI shares.

The Court placed no significance on the passive role played by the wives in the management of the company, stating [at para. 69] as follows:

The respondents placed much emphasis on the fact that the applicants took no role in running the corporations. Just because the shareholders left the day-to-day management of the corporations to the directors does not mean they did not hold the shares outright. Corporate management is not a prerequisite to shareholding.

In light of the foregoing, the Gustafson case is a helpful reminder that gifts of company shares from current shareholders to their spouses in order to provide some personal “creditor proofing” for the shareholders will be upheld as valid share transfers so long as the gifts are properly documented and the transfers properly recorded on the company’s share transfer register.

While it may be difficult to arrive at a precise definition, diversity is often taken to mean a state of being different or varied. In the context of business organizations, it is often taken to mean the inclusion or representation of women, minorities, the LGBT community, aboriginal peoples, those with disabilities, and many other groups who are different from each other in some respects.

When applied to corporate governance, diversity is often taken to mean bringing people with different perspectives together around a boardroom table, some having a skin colour, sexual orientation or gender different from the others.

Yet, despite their differences in appearance, those nominated and elected to the board may not be that much different from each other when comparing their personality type, or their approach to problem solving, or the way they think. In other words, a board may have a diversity look, but lack diversity in thought.

Regardless of whether a company board has a nominating committee or governance committee, it should attempt to regularly self-evaluate its strengths and weaknesses, and look at the skill set of each director, ostensibly to assist board recruitment and succession planning. When severe gaps are found to exist, or will exist, between the skills available and the skills needed, a recruitment firm may be retained to find suitable replacements.

While searching for such replacements may result in a talent pool that has the appearance of diversity, the criteria used in the search generally follow a traditional pattern. Prospective directors with expertise in law, accounting, or human resources, and experience serving as board directors or senior corporate executives are usually preferred, leaving a smaller pool to choose from. And those who are more experienced, or senior, are preferred over those who are not.

This seniority preference, or bias, can lead to directors who are only nominally diverse, having a lot more in common with each other than not. While the professions usually represented on boards are considerably more diversified than a generation ago, the senior professionals who are selected for board positions do not reflect the diverse nature of their professions at large, or at least not yet.

But adding younger board members, who are often more attuned to recent advances in technology than older directors, does not seem to be happening, despite the critical need for boards to be constantly assessing the opportunities and threats created by technological change. Many talented younger executives who might benefit from serving on an outside board are often deterred by their own companies, requesting them to remain focused on company matters and affording them little time to devote to other boards.

Much has been written on the disadvantages of “group think” and the desire of board members to “fit in”. There has always been a need for boards to encourage different points of view, to allow directors to speak up, to analyze issues comprehensively and not simply “rubber-stamp” management recommendations. This requires some diversity of thought, not just diversity in appearance, in the boardroom. And this requires that the traditional criteria used to select prospective directors be broadened in order to further diversify the talent pool.

Looking beyond accounting, law and M.B.A. degrees and beyond strict business experience can lead to identifying very capable individuals who can add essential perspective at the board level on numerous issues, including those relating to risk, strategy, and leadership. A truly diversified board can be comprised of those serving, or having served, in academia, the military, charitable organizations, or the public service, as well as in corporations and professional firms.

If the main purpose of good governance is to allow a company to manage its business and achieve its objectives while maintaining its long-term viability, then a diversified board, representing different perspectives and capable of generating a variety of ideas, seems better suited to deal with the challenges of today’s complex, fast-changing business environment than the undiversified board of a generation ago.


A mortgage amended to provide for a 25% per annum interest rate to take effect only when the mortgagor failed to make prescribed payments at a lower “pay rate” of 7.5% was caught by the prohibition in section 8 of the Interest Act.

The case of Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, provides a warning to lenders offering lower “incentive rates” by holding that there is no distinction between mortgage terms imposing by way of penalty a higher rate in the event of default, and mortgage terms reserving by way of discount a lower rate in the event of no default.

As described in a previous post on this blog dated October 20, 2015 relating to the case of P.A.R.C.E.L. Inc. et al v. Acquaviva et al, 126 O.R. (3d) 108 (C.A.), section 8 of the Interest Act provides that no rate of interest shall be taken on any arrears of principal or interest secured by a mortgage on real property that has the effect of increasing the charge on the arrears beyond the rate of interest payable on the principal money not in arrears.

In the Krayzel case, the owner of an office building was unable to pay out its mortgage on the building upon maturity, leading to renewal of the mortgage at a per annum interest rate of 25 percent but allowing the owner to make monthly interest payments at the “pay rate” of either 7.5 percent or at the prime interest rate plus 5.25 percent, whichever was greater. The difference between the amount payable at the stated interest rate of 25 percent and the amount payable by the owner at the lower rate would accrue to the mortgage loan, and if there were no default by the owner, the accrued interest would be forgiven.

When the owner defaulted, the lender demanded repayment of the loan at the stated rate of 25 percent and sued the owner in the Alberta courts. When the Alberta Court of Appeal held that the mortgage complied with section 8, the owner appealed to the Supreme Court of Canada.

In allowing the appeal, a majority of the Supreme Court held [at para. 3] that “a rate increase triggered by default does infringe s. 8 irrespective of whether the impugned term is cast as imposing a higher rate penalizing default, or as allowing a lower rate by way of a reward for the absence of default”. However, “a rate increase triggered by the passage of time alone does not infringe s. 8”.

In confirming that the purpose of section 8 is to protect landowners from charges that would make it impossible for them to redeem, or to protect their equity, the Supreme Court majority held [at para. 22] as follows:

On its own, this purpose does not support drawing a distinction between a higher interest rate cast as a penalty for default, and a discounted interest rate for punctual payment. In both cases, the effect is to impose a higher rate of interest on arrears of interest or principal than that payable on principal money not in arrears, thereby making it more difficult for borrowers who are already in default to redeem or protect their equity.

The majority continued [at para. 24 and 25] to explain section 8 as follows:

Section 8(1) identifies three classes of charges – a fine, a penalty or a rate of interest – that shall not be “stipulated for, taken, reserved or enacted” if “the effect” of doing so imposes a higher charge on arrears than that imposed on principal money not in arrears. Section 8(2) affirms that subs. (1) does not prohibit a contract from requiring payment of interest on arrears of interest or principal at a rate equivalent to or lower than that payable on principal money not in arrears. … Had Parliament intended to prohibit only penalties (and not discounts), it would not have included a “fine” or a “rate of interest”, in addition to a “penalty”, as a type of charge that might also be prohibited. … Further, by directing the inquiry to the effect of the impugned mortgage term, Parliament clearly intended that mortgage terms guised as a “bonus”, “discount” or “benefit” would not as such comply with s.8. Substance, not form, is to prevail. What counts is how the impugned term operates, and the consequence it produces, irrespective of the label used. If its effect is to impose a higher rate on arrears than on money not in arrears, then s. 8 is offended.

The Supreme Court’s dissenting reasons agree [at para. 53] with the majority view that “the drafters appear to have been concerned that such higher charges would make it all but impossible for debtors to repay their debts, protect their equity and avoid foreclosure” but disagree [at para. 54] over the impact of all discounts, as follows:

I would note that not all discounts, viewed in their commercial context, will undermine the intended protection for struggling debtors. In some cases, a discount may be introduced in a renewal agreement to provide relief from a higher rate of interest for which payment is already due. Such an agreement can hardly be said to be unfair or tainted by abuse, coercion, intimidation or penalty.

The minority expressed [at para. 56] the benefits of discounted rates as follows:

In the end, these kinds of “relieving” or “forgiving” interest rate discounts will generally make it easier for struggling mortgage debtors to meet their payment obligations. At worst, they will simply leave debtors in the same situation they found themselves in under the terms of their initial agreement. If s.8 is interpreted as prohibiting discounts of this nature, lenders could in the future be discouraged from relieving the interest burden on struggling debtors, a disturbing irony given the purpose for which s.8 was enacted.

In light of the majority decision in Krayzel, despite these benefits of lower rates, lenders will have to be wary if they offer them. They will have to keep in mind that section 8 applies to discounts as well as penalties, so that when they are structuring mortgage loans, they should remember that offering a discount to a borrower for making timely payment as opposed to penalizing them for not paying on time will still offend section 8.

However, lower rates may be offered if they increase by reason only of the passage of time, as often occurs when “introductory”, “teaser” or other incentive rates increase throughout the term of the loan. After all, the traditional yield curve indicates lenders deserve and expect higher rates the longer the loan’s term to maturity.

The Supreme Court’s divided 6-3 decision in Krayzel suggests that until there is statutory reform, there will continue to be some commercial uncertainty over the interpretation of section 8, and hence more cases like Krayzel and the P.A.R.C.E.L. case mentioned in our previous blog post.