Peoples Department Stores Inc. (Bankrupt) v. Wise, (2004) 326 N.R. 267 (SCC)

• Judge: Iacobucci, Major, Bastarache, Binnie, LeBel, Deschamps and Fish, JJ.
• Court: Supreme Court (Canada)
• Case Date: May 11, 2004
• Jurisdiction: Canada (Federal)
• Citations: (2004), 326 N.R. 267 (SCC);2004 SCC 68;134 ACWS (3d) 548;326 NR 267;[2004] SCJ No 64 (QL);[2004] CarswellQue 2862;JE 2004-2016;AZ-50277289;EYB 2004-72160;4 CBR (5th) 215;244 DLR (4th) 564;[2004] 3 SCR 461;49 BLR (3d) 165;[2004] ACS no 64

Peoples Dept. Stores Inc. v. Wise (2004), 326 N.R. 267 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Temp. Cite: [2004] N.R. TBEd. OC.040

In The Matter Of the Bankruptcy of Peoples Department Stores Inc./Magasins à rayons Peoples inc.

Caron Bélanger Ernst & Young Inc., in its capacity as Trustee to the bankruptcy of Peoples Department Stores Inc./Magasins à rayons Peoples inc. (appellant) v. Lionel Wise, Ralph Wise and Harold Wise (respondents) and Chubb Insurance Company of Canada/Compagnie d'assurance Chubb du Canada (respondent)

(29682; 2004 SCC 68; 2004 CSC 68)

Indexed As: Peoples Department Stores Inc. (Bankrupt) v. Wise

Supreme Court of Canada

Iacobucci, Major, Bastarache, Binnie, LeBel, Deschamps and Fish, JJ.

October 29, 2004.

Summary:

The Wise brothers were majority share­holders, officers and directors of Wise Stores. Wise Stores acquired Peoples Depart­ment Stores. The sale agreement prohibited Wise Stores from amalgamating with Peoples until the purchase price was paid. The Wise brothers became the sole directors of Peoples. The companies consolidated over­lapping corporate functions. Inventory management problems arose. The Wise brothers implemented a joint inventory procurement policy whereby Peoples made all purchases from North American suppliers and Wise Stores made all purchases from overseas suppliers. Peoples then transferred to Wise Stores what it had purchased for Wise Stores, charging it accordingly, and vice versa. This resulted in Peoples extend­ing a significant trade credit to Wise Stores. Peoples and Wise Stores went bankrupt. Peoples' trustee in bankruptcy filed a peti­tion against the Wise brothers. The trustee claimed that the Wise brothers had favoured the interests of Wise Stores over Peoples to the detriment of Peoples' creditors, thereby breaching their duties as directors under s. 122(1) of the Canada Business Corporations Act (CBCA). The trustee also claimed that the Wise brothers had, in the year preceding the bankruptcy, been privy to transactions in which property had been transferred for con­spicuously less than fair market value within the meaning of s. 100 of the Bank­ruptcy and Insolvency Act (BIA).

The Quebec Superior Court, in a decision reported at 23 C.B.R.(4th) 200, found the Wise brothers liable under the CBCA and the BIA. The Wise brothers appealed.

The Quebec Court of Appeal, in a decision reported at [2003] R.J.Q. 796; 224 D.L.R. (4th) 509; 41 C.B.R.(4th) 225, allowed the appeal. The trustee appealed.

The Supreme Court of Canada dismissed the appeal.

Bankruptcy - Topic 7904

Reviewable transactions - Reviewable transaction defined - Wise Stores (Wise) acquired Peoples Department Stores (Peoples) - The sale agreement prohibited Wise from amalgamating with Peoples un­til the purchase price was paid - The com­panies consolidated overlapping cor­porate functions - Inventory management prob­lems arose - The companies imple­mented a joint inventory procurement policy whereby Peoples made all purchases from North American suppliers and Wise made all purchases from overseas supp­liers - Peoples then transferred to Wise what it had purchased for Wise, charging Wise ac­cordingly, and vice versa - This resulted in Peoples extending a significant trade credit to Wise - Peoples and Wise went bankrupt - Peoples' trustee in bank­ruptcy argued that Peoples had transferred inven­tory to Wise for conspicuously less than fair mar­ket value within the meaning of s. 100 of the Bankruptcy and Insolvency Act - The Supreme Court of Canada affirmed that these inventory transfers could consti­tute reviewable transactions - However, the transactions had to be con­sidered over the entire period of the new policy - The court was not satisfied that a disparity of slightly more than six percent between fair market value and the con­sideration received con­stituted a "conspicu­ous" difference - See paragraphs 79 to 88.

Bankruptcy - Topic 7906

Reviewable transactions - Privy to transac­tion defined - Section 100(2) of the Bank­ruptcy and Insolvency Act provided that where a bankrupt received consideration in a reviewable transaction that was conspicu­ously less than the fair market value for the property or services, the court could give judgment against the other party or "any other person being privy to the trans­action" for the difference between the consideration and the fair market value - The Supreme Court of Canada stated that s. 100's primary purpose was to reverse the effects of a transaction that stripped value from the bankrupt's estate - The court stated that "It makes sense to adopt a more inclusive understanding of the word 'privy' to prevent someone who might receive indirect benefits to the detriment of a bankrupt's unsatisfied creditors from frustrating the provision's remedial pur­pose. The word 'privy' should be given a broad reading to include those who benefit directly or indirectly from and have knowl­edge of a transaction occurring for less than fair market value. ... this rationale is particularly apt when those who benefit are the controlling minds behind the transac­tion." - See paragraph 91.

Bankruptcy - Topic 7908

Reviewable transactions - Review of con­sideration - Section 100(1) of the Bank­ruptcy and Insolvency Act provided that a court "may" review transactions conducted within a year preceding the bankruptcy to determine if the bankrupt gave or received fair market value in consideration for the property or services involved in the trans­action - Where the consideration was "conspicuously greater or less" than the fair market value, the court "may" give judgment to the trustee for the difference between the consideration and the fair market value (s. 100(2)) - The Supreme Court of Canada agreed that, even if the preconditions were present, the exercise of jurisdiction under s. 100(1) to inquire into a transaction and under s. 100(2) to grant judgment was discretionary and equitable principles guided the exercise of discretion - The court also agreed that in the context of s. 100(2), "the good faith of the parties, the intention with which the transaction took place, and whether fair value was given and received in the transaction are important considerations as to whether that discretion should be exercised." - See paragraphs 80 to 82.

Bankruptcy - Topic 7908

Reviewable transactions - Review of con­sideration - Section 100(1) of the Bank­ruptcy and Insolvency Act permitted a court to review transactions conducted within a year preceding the bankruptcy to determine if the bankrupt gave or received fair market value in consideration for the property or services involved in the trans­action - Where the consideration was "conspicuously greater or less" than the fair market value, the court could give judgment to the trustee for the difference between the consideration and the fair market value (s. 100(2)) - The Supreme Court of Canada discussed factors that might be relevant in determining whether the difference in consideration was "con­spicuously greater or less" - See para­graphs 85 and 86.

Bankruptcy - Topic 7908

Reviewable transactions - Review of con­sideration - [See Bankruptcy - Topic 7904 ].

Bankruptcy - Topic 7910

Reviewable transactions - Judgment - Discretion - [See Bankruptcy - Topic 7904 and first and second Bankruptcy - Topic 7908 ].

Company Law - Topic 4190

Directors - Liability of directors - Defences - Reliance on professional advice - The Wise brothers were majority shareholders, officers and directors of Wise Stores - Wise Stores acquired Peoples Department Stores - The Wise brothers became the sole directors of Peoples - The companies consolidated overlapping corporate func­tions - Inventory management problems arose - The Wise brothers consulted with Clément, Wise Store's vice president of finance, who recommended implementing a joint inventory procurement policy - The policy resulted in Peoples extending a significant trade credit to Wise Stores - Peoples and Wise Stores went bankrupt - The trustee sued the Wise brothers for, inter alia, breach of fiduciary duties and duty of care in respect to creditors - The Supreme Court of Canada held that the Wise brothers could not invoke the defence in s. 123(4)(b) of the Canada Business Corporations Act (good faith reliance on judgment of person whose profession lent credibility to statement) - Although Clé­ment had a bachelor's degree in commerce and 15 years of experience in administra­tion and finance with Wise Stores, this experience did not correspond with the level of professionalism required under s. 123(4)(b) - Clément was simply a non-pro­fessional employee of Wise Stores - See paragraphs 76 to 78.

Company Law - Topic 4262

Directors - Duties - General principles - Fiduciary duty - Section 122(1)(a) of the Canada Business Corporations Act pro­vided that "Every director and officer of a corporation in exercising their powers and discharging their duties shall act honestly and in good faith with a view to the best interests of the corporation" - The Supreme Court of Canada stated that "The statutory fiduciary duty requires directors and offi­cers to act honestly and in good faith vis-à-vis the corporation. They must respect the trust and confidence that have been re­posed in them to manage the assets of the corporation in pursuit of the realiz­ation of the objects of the corporation. They must avoid conflicts of interest with the cor­poration. They must avoid abusing their posi­tion to gain personal benefit. They must maintain the confidentiality of infor­mation they acquire by virtue of their posi­tion. Directors and officers must serve the corporation selflessly, honestly and loyally ..." - See paragraph 35.

Company Law - Topic 4262

Directors - Duties - General principles - Fiduciary duty - Section 122(1)(a) of the Canada Business Corporations Act pro­vid­ed that "Every director and officer of a corporation in exercising their powers and discharging their duties shall act honestly and in good faith with a view to the best interests of the corporation" - The Supreme Court of Canada stated that "it is clear that the phrase the 'best interests of the cor­poration' should be read not simply as the 'best interests of the shareholders'. From an economic perspective, the 'best interests of the corporation' means the maximiza­tion of the value of the corporation ... However, the courts have long recognized that various other factors may be relevant in determining what directors should con­sider in soundly managing with a view to the best interests of the corporation. ... in determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given all the circum­stances of a given case, for the board of directors to consider, inter alia, the inter­ests of shareholders, employees, suppliers, creditors, consumers, governments and the environment. The various shifts in interests that naturally occur as a corporation's fortunes rise and fall do not, however, affect the content of the fiduciary duty under s. 122(1)(a) ... At all times, directors and officers owe their fiduciary obligation to the corporation. The interests of the corporation are not to be confused with the interests of the creditors or those of any other stakeholders." - See paragraphs 42 and 43.

Company Law - Topic 4262

Directors - Duties - General principles - Fiduciary duty - The Supreme Court of Canada stated that "In assessing the actions of directors it is evident that any honest and good faith attempt to redress the cor­poration's financial problems will, if suc­cessful, both retain value for shareholders and improve the position of creditors. If unsuccessful, it will not qualify as a breach of the statutory fiduciary duty. ... In using their skills for the benefit of the corpor­a­tion when it is in troubled waters finan­cial­ly, the directors must be careful to at­tempt to act in its best interests by creat­ing a 'better' corporation, and not to favour the interests of any one group of stake­holders." - See paragraphs 46 and 47.

Company Law - Topic 4262

Directors - Duties - General principles - Fiduciary duty - Section 122(1)(a) of the Canada Business Corporations Act pro­vided that "Every director and officer of a corporation in exercising their powers and discharging their duties shall act honestly and in good faith with a view to the best interests of the corporation" - The Supreme Court of Canada stated that in light of the availability of the oppression remedy under s. 241 of the Act and an action based on the duty of care in s. 122(1)(b) stake­holders had viable remedies at their dis­posal to protect their interests - There­fore, there was no need to extend the fiduciary duty imposed on directors by s. 122(1)(a) to include creditors - See para­graphs 51 to 53.

Company Law - Topic 4266

Directors - Duties - General principles - Breach of fiduciary duty - What constitutes - The Wise brothers were majority share­holders, officers and directors of Wise Stores - Wise Stores acquired Peoples De­partment Stores - The sale agreement pro­hibited Wise Stores from amalgamating with Peoples until the purchase price was paid - The Wise brothers became the sole directors of Peoples - The companies con­solidated overlapping corporate func­tions - Inventory management problems arose - The Wise brothers implemented a joint in­ventory procurement policy - The policy resulted in Peoples extending a significant trade credit to Wise Stores - Peoples and Wise Stores went bankrupt - The Supreme Court of Canada held, inter alia, that the Wise brothers considered the inventory man­agement problem and imple­mented a pol­icy that they hoped would solve it - In the absence of evidence of a personal in­terest or improper purpose in the new policy and in light of the evidence of a desire to make both Wise Stores and Peoples "better" corporations, the Wise brothers did not breach their fiduciary duty under s. 122(1)(a) of the Canada Business Corporations Act - See paragraphs 34 to 41.

Company Law - Topic 4266

Directors - Duties - General principles - Breach of fiduciary duty - What constitutes - [See third Company Law - Topic 4262 ].

Company Law - Topic 4268

Directors - Duties - General principles - Duty to exercise care, diligence and skill - Section 122(1)(b) of the Canada Business Corporations Act provided that "Every director and officer of a corporation in exercising their powers and discharging their duties shall exercise the care, dili­gence and skill that a reasonably prudent person would exercise in comparable cir­cumstances" - The Supreme Court of Can­ada held that the standard of care under s. 122(1)(b) was objective - See paragraph 63 - The court stated that "Di­rectors and offi­cers will not be held to be in breach of the duty of care under s. 122(1)(b) ... if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known. In determining whether direc­tors have acted in a manner that breached the duty of care, it is worth repeating that perfec­tion is not demanded. Courts are ill-suited and should be reluc­tant to second-guess the application of business expertise to the considerations that are involved in cor­porate decision making, but they are cap­able, on the facts of any case, of deter­mining whether an appropri­ate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business deci­sion at the time it was made." - See para­graph 67.

Company Law - Topic 4268

Directors - Duties - General principles - Duty to exercise care, diligence and skill - The Wise brothers were majority share­holders, officers and directors of Wise Stores - Wise Stores acquired Peoples De­partment Stores - The sale agreement pro­hibited Wise Stores from amalgamating with Peoples until the purchase price was paid - The Wise brothers became the sole directors of Peoples - The companies con­solidated overlapping corporate func­tions - Inventory management problems arose - The Wise brothers implemented a joint inventory procurement policy - The policy resulted in Peoples extending a significant trade credit to Wise Stores - Peoples and Wise Stores went bankrupt - The Supreme Court of Canada affirmed that the Wise brothers did not breach their duty of care to Peoples' creditors under s. 122(1)(b) of the Canada Business Corpor­ations Act by implementing the new pro­curement policy - The implementation of the new policy was a reasonable business decision that was made to rectify a serious and urgent business problem in circum­stances in which no solution may have been possible - See paragraphs 68 to 71.

Company Law - Topic 4276

Directors - Duties - General principles - Business judgment rule - [See first Com­pany Law - Topic 4268 ].

Company Law - Topic 4603

Officers and agents - Duty to company - Fiduciary duty - [See first and second Company Law - Topic 4262 ].

Company Law - Topic 4604

Officers and agents - Duty to company - Duty to exercise care, diligence and skill - [See first Company Law - Topic 4268 ].

Company Law - Topic 5283

Borrowing - Prohibited borrowing transac­tions - Financial assistance to related com­pany - Section 44(2) of the Canada Busi­ness Corporations Act (now repealed) provided that "A corporation may give financial assistance by means of a loan, guarantee or otherwise ... (c) to a holding body corporate if the corporation is a wholly-owned subsidiary of the holding body corporate" - The Supreme Court of Canada stated that although s. 44(2) au­thorized certain forms of financial assis­tance between corporations, that could not exempt directors and officers from poten­tial liability under s. 122(1) (fiduciary duty and duty of care) for any financial assist­ance given by subsidiaries to a parent company - See paragraphs 73 to 75.

Equity - Topic 3646

Fiduciary or confidential relationships - Breach of fiduciary relationship - By direc­tor or officer of company - [See third Company Law - Topic 4262 and first Company Law - Topic 4266 ].

Words and Phrases

Privy - The Supreme Court of Canada discussed the meaning of the word "privy" as used in s. 100(2) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 - See paragraphs 89 to 92.

Cases Noticed:

Automatic Self-Cleansing Filter Syndicate Co. v. Cuninghame, [1906] 2 Ch. 34 (C.A.), refd to. [para. 31].

K.L.B. et al. v. British Columbia et al., [2003] 2 S.C.R. 403; 309 N.R. 306; 187 B.C.A.C. 42; 307 W.A.C. 42; 2003 SCC 51, refd to. [para. 36].

Canadian Aero Service Ltd. v. O'Malley, [1974] S.C.R. 592, refd to. [para. 38].

820099 Ontario Inc. v. Ballard (Harold E.) Ltd. (1991), 3 B.L.R.(2d) 123 (Ont. Gen. Div.), affd. (1991), 3 B.L.R.(2d) 113 (Ont. Div. Ct.), refd to. [para. 41].

Teck Corp. v. Millar (1972), 33 D.L.R.(3d) 288 (B.C.S.C.), refd to. [para. 42].

Olympia & York Enterprises Ltd. v. Hiram Walker Resources Ltd. (1986), 59 O.R.(2d) 254 (Div. Ct.), refd to. [para. 42].

373409 Alberta Ltd. et al. v. Bank of Montreal et al., [2002] 4 S.C.R. 312; 296 N.R. 244; 317 A.R. 349; 284 W.A.C. 349; 2002 SCC 81, dist. [para. 52].

Brasserie Labatt ltée v. Lanoue, [1999] Q.J. No. 1108 (C.A.), refd to. [para. 55].

Regent Taxi & Transport Co. v. Congré­gation des Petits Frères de Marie, [1929] S.C.R. 650, revd. [1932] 2 D.L.R. 70 (P.C.), refd to. [para. 56].

Lister v. McAnulty, [1944] S.C.R. 317, refd to. [para. 56].

Laurent et al. v. Théoret; Laurent et al. v. Hôpital Notre-Dame de l'Espérance, [1978] 1 S.C.R. 605; 17 N.R. 593, refd to. [para. 56].

Hôpital Notre-Dame de l'Espérance v. Laurent - see Laurent et al. v. Théoret; Laurent et al. v. Hôpital Notre-Dame de l'Espérance.

Dovey v. Cory, [1901] A.C. 477 (H.L.), refd to. [para. 59].

Brazilian Rubber Plantations and Estates Ltd., Re, [1911] 1 Ch. 425 (C.A.), refd to. [para. 59].

City Equitable Fire Insurance Co., Re, [1925] 1 Ch. 407 (C.A.), refd to. [para. 59].

Soper v. Minister of National Revenue, [1998] 1 F.C. 124; 215 N.R. 372 (F.C.A.), consd. [para. 63].

Pente Investment Management Ltd. et al. v. Schneider Corp. et al. (1998), 113 O.A.C. 253; 42 O.R.(3d) 177 (C.A.), refd to. [para. 65].

Maple Leaf Foods Inc. v. Schneider Corp. - see Pente Investment Management Ltd. et al. v. Schneider Corp. et al.

Standard Trustco Ltd. (Bankrupt) v. Stan­dard Trust Co. (1995), 86 O.A.C. 1; 26 O.R.(3d) 1 (C.A.), folld. [para. 81].

Skalbania (Trustee of) v. Wedgewood Village Estates Ltd. (1989), 37 B.C.L.R.(2d) 88 (C.A.), refd to. [para. 85].

Statutes Noticed:

Canada Business Corporations Act, R.S.C. 1985, c. C-44, sect. 44(2) [para. 73]; sect. 122(1) [para. 32].

Authors and Works Noticed:

Allen, William T., Jacobs, Jack B., and Strine, Jr., Leo E., Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law (2001), 26 Del. J. Corp. L. 859, p. 892 [para. 66].

Beck, Stanley M., Minority Shareholders' Rights in the 1980s, in Corporate Law in the 80s (1982), L.S.U.C. Special Lec­tures 311, p. 312 [para. 48].

Brock, Jason, The Propriety of Profit­making: Fiduciary Duty and Unjust Enrichment (2000), 58 U.T. Fac. L. Rev. 185, pp. 204, 205 [para. 38].

Crête, Raymonde, and Rousseau, Stéphane, Droit des sociétés par actions: principes fondamentaux (2002), p. 58 [para. 29].

Dickerson, Robert W.V., Howard, John L., and Getz, Leon, Proposals for a New Business Corporations Law for Canada (1971), vols. 1, p. 83 [para. 61]; 2, p. 74 [para. 61].

Gray, Wayne D., Peoples v. Wise and Dylex: Identifying Stakeholder Interests upon or near Corporate Insolvency - Stasis or Pragmatism (2003), 39 Can. Bus. L.J. 242, p. 257 [para. 47].

Houlden Lloyd W., and Morawetz, Geof­frey B., Bank­ruptcy and Insolvency Law of Canada (3rd Ed.) (2003 Loose­leaf Update - Release 9), vol. 2, p. 4-114.1 [para. 86].

Iacobucci, Edward M., and Davis, Kevin E., Reconciling Derivative Claims and the Oppression Remedy (2000), 12 S.C.L.R.(2d) 87, p. 114 [para. 47].

Iacobucci, Edward M., Directors' Duties in Insolvency: Clarifying What is at Stake (2003), 39 Can. Bus. L.J. 398, pp. 400, 401 [para. 42].

Martel, Paul, Le "voile corporatif" - l'at­titude des tribunaux face à l'article 317 du Code civil du Québec (1998), 58 R. du B. 95, pp. 135, 136 [para. 55].

McGuinness, Kevin Patrick, The Law and Practice of Canadian Business Corpor­ations (1999), pp. 715 [para. 35]; 776 [para. 59].

Thomson, David, Directors, Creditors and Insolvency: A Fiduciary Duty or a Duty Not to Oppress? (2000), 58 U.T. Fac. L. Rev. 31, p. 48 [para. 48].

Counsel:

Gerald F. Kandestin, Gordon Kugler and Gordon Levine, for the appellant;

Éric Lalanne and Martin Tétreault, for the respondents, Lionel Wise, Ralph Wise and Harold Wise;

Ian Rose and Odette Jobin-Laberge, for the respondent, Chubb Insurance Company of Canada.

Solicitors of Record:

Kugler Kandestin, Montréal, Quebec, for the appellant;

de Grandpré Chait, Montréal, Quebec, for the respondents, Lionel Wise, Ralph Wise and Harold Wise;

Lavery, de Billy, Montréal, Quebec, for the respondent, Chubb Insurance Com­pany of Canada.

This appeal was heard on May 11, 2004, by Iacobucci, Major, Bastarache, Binnie, LeBel, Deschamps and Fish, JJ., of the Supreme Court of Canada. The following decision of the Supreme Court of Canada was delivered in both official languages by Major and Deschamps, JJ., on October 29, 2004. Iacobucci, J., took no part in the judgment.