The Quebec Superior Court sets the rules applicable in class actions against directors of companies

1 juillet 2003

Ce billet est disponible en anglais seulement.

Over the last few years, an increasing number of lawsuits have been instituted against the directors of companies in connection with their activities as directors. This trend, often driven by plaintiffs who are looking for solvent defendants, has also extended to class actions.

However, a recent judgment of the Superior Court1 has reiterated that a petitioner must allege particular circumstances and detailed facts in order to obtain the permission to exercise a class action against the directors of a company.

In this case, Petitioner Murray Black was a former employee of Place Bonaventure Inc. (PBI), who had retired in 1995. The litigation related to the modification of PBI’s employees’ pension plan in 1998 while PBI was laying-off twenty-eight of its employees.

Black claimed that PBI was amending the pension plan in an attempt to improve the retirement of eight employees. He alleged that PBI had acted in this way in order to avoid paying severance to its employees and that PBI had therefore diminished the pension fund by a substantial amount. According to Black, all the participants in the pension fund benefit from the eventual right to the surplus accumulated in the fund when it is terminated, which right cannot be modified without obtaining the participants’ prior consent. Hence, Black filed a motion in order to obtain the authorization to exercise a class action against PBI as well as against its directors, its principal shareholder and the administrator of the pension fund, thereby seeking to obtain a condemnation against all of said defendants to reimburse the amounts that were paid out pursuant to the amendment.

Black contended that PBI and its directors had acted in bad faith in allowing the amendment to the pension plan without the prior consent of the participants.

This judgment of the Superior Court sets out the guiding criteria for the authorization of a class action against directors in the Province of Quebec. The Honorable Justice Nicole Bénard’s decision is based on a decision of the Court of Appeal2 that had determined that a director of a company will be personally liable towards the creditors of the company in the following circumstances:

  • the director gave his personal guarantee with respect to one of the company’s contractual obligations;
  • the director had himself committed a fault resulting in his extra-contractual liability, for instance, by making false representations or by remitting falsified documents;
  • the director had actively participated to an extracontractual fault of the company (which can be assumed in the case of a sole director);
  • the director has used the company that he controls as a screen in an attempt to hide the fact that he has committed a fraud or an abuse of right or that he contravened a rule pertaining to public order.

Justice Bénard states that in order to dispose of a motion seeking the authorization to exercise a class action, the Court must accept as true all the allegations of facts contained therein. However, she underlines that any petitioner who wishes to exercise a class action must still demonstrate an appearance of right against each and every defendant that is the object of the recourse. Justice Bénard noted that the fault alleged by Black against PBI’s directors was identical to the fault alleged against the company, i.e. to have authorized an amendment to the pension plan without having obtained the prior consent of the participants. Black did not allege that the directors of the company had received a personal benefit from the contested amendment nor did he allege that they had exceeded their mandate as directors. According to the Court, the sole allegation that the directors may have committed a fault by not obtaining the consent of the participants is insufficient and a fault distinct from the one alleged against the company should have been pleaded. Justice Bénard concluded that the petitioner did not allege sufficient facts that could support a recourse based on the directors’ personal liability and therefore refused to authorize a class action against them.3 This decision is currently in appeal.

Even if the Quebec courts have a tendency to favor the authorization of class actions4, this decision is good news for the directors of companies as it has established that petitioners must allege in the early stage of the motion seeking the authorization of a class action, precise facts demonstrating a serious appearance of right against the directors, failing which the authorization will be refused.

1 Murray Black c. Place Bonaventure et als, 500-06-000141-016, December 9, 2002, rendered by the Honorable Justice Nicole Bénard.
2 Lanoue c. Brasserie Labatt Ltée, REJB 1999-11842 (C.A.)
3 This class action was also refused against the other co-defendants for other reasons.
4 See the last newsletter edition on class actions.

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