There is no little irony in that Markus Koehnen (now Superior Court Judge), was both quoted by Cote J. in the unanimous supreme court of Canada judgement (Wilson v Alharyeri) and issues the last word in this important oppression case (Alharayeri v. Wilson [2018] O.J. No. 5876.
Alharayeri was the owner of class A and B and also common shares in Wi2Wi, a CBCA corporation. Leading up to a private placement where all common shareholders of Wi2Wi had the opportunity to sell their common shares to a third party, Wi2Wi, more particularly Wilson and the other audit committee member (Black) strongly advocated that Alharayeri’s class A and class B shares not be turned into common shares. (para 4)
Consequently Alharayeri missed out on the change to make about $1M in gains. (para 5).
All courts sided with Alharayeri up to the SCC where Cote J. concisely stated the low threshold required to apply personal liability to directors. Both Wilson and Black were found liable to pay Alharayeri approximately $1M. (para 5).
As every lawyer knows, judgement is only the first, not the last step in litigation. Naturally Wilson was judgment-proof. Alharayeri turned to the corporate indemnity policy.
Officers and directors indemnity clauses are part of that boilerplate that lawyers seldom see in action in everyday litigation. In this case, Wi2Wi asserted a battery of arguments as to why the corporation didn’t have to ‘indemnify’ Wilson for any claim by Alharayeri.
Keep in mind that Wi2Wi was not found guilty of oppression. The findings were against Wilson and Black personally. So the only attack against the company could come through the purported indemnity clause which specifically excluded negligence and bad faith conduct.
Koehnen, the author of the leading Canadian oppression text (Oppression and Related Remedies, 2004, Thompson Carswell) had to address a counterintuitive situation.
The conventional oppression case is rife with bad faith on the part of controlling parties, (usually directors and officers). Wilson v Alharayeri thus exposes the fact that the very finding of wrongdoing in the ordinary oppression case, forecloses access by the victim to the company indemnification (insurance) policy.
Is oppression bad faith conduct so as to exclude the policy?
It so happened in Wilson v. Alharayeri, that Wilson walked so fine a line that his conduct was not considered bad faith, or negligence per se (para 19) so the indemnification was still available. Koehnen J. says that in committing oppression, Wilson did not commit a ‘fault’ (para 17).
Does the company owe a ‘Debt’ to Wilson?
But the company didn’t owe anything to Wilson, so how could Alharayeri assert, in garnishing, that there was a ‘debt’ owing to Wilson from the company?
Alharayeri purported to send notice of garnishment to Wi2Wi. The company asserted no ‘debt’ was owing. No court has made any order of payment from Wi2Wi to Wilson, so what ‘debt’ could Alharayeri possible be talking about?
Every garnishment lawyer sees this denial of debt owing tactic from purported creditors of the debtor. Koehnen says that there need not be any judgment debt as between Wilson and Wi2Wi, only that the nexus between Wilson and Wi2Wi was ‘capable of being made into an action for liquidated damages’ (per rule 60.08). (para 26). That is all that is required.
Koehnen said that since Wi2Wi had been third-partied throughout, it should have argued that the indemnity did not apply at its earliest opportunity. Wi2Wi should have seen the risk that it would be called upon through the indemnity policy and should have fully asserted the position it now wants to take. (para 42).
Wi2Wi argued that, having been third partied rather named as a defendant in the original action, Alharayeri is now estopped from seeking to make Wi2Wi pay (through indemnification) because the act of third partying is an admission by Alharayeri that Wi2Wi was not responsible. And it is only on a theory of agent-principal responsibility that the indemnity clause could trigger. So how could Alharayeri now say that Wi2Wi is vicariously responsible when Alharayeri then said Wi2Wi was not responsible (because not named as a defendant).
Koehnen said that ‘abuse of process’ is used where the party knowingly asserts inconsistent positions in different actions. (para 54). Where Alharayeri started his claim thinking that Wi2Wi may not have been liable, it was not an abuse to later take a position that Wi2Wi was responsible (for indemnity) after the judicial determinations were made consistent with (though not specifically finding) Wi2Wi responsibility (in indemnity).
Limitations Act s.18: must attack the indemnifier within 2 years of serving the statement of claim
A further treacherous area for the oppression claimant is the ‘indemnity’ clause (s.18) in the Limitations Act, which says that an indemnity claim (wrongdoer-to-wrongdoer) must be started within two years of the date upon which the original claim was served upon the original wrongdoer.
Koehnen rightly pointed out that inelegant handling of this provision would deprive successful plaintiffs of ever accessing indemnity policies – an intolerable result.
A plaintiff cannot generally name an indemnifier of a defendant who has not yet been determined to be at fault. (para 63).
So a tactical non-naming of an indemnifier by the defendant and dragging the proceedings out for two years would automatically disentitle the successful plaintiff from access to an indemnity policy (para 64) – an intolerable result.
Here again is the counter-intuitive aspect of this case. Only because Wi2Wi was not itself a ‘wrongdoer’ was Koehnen able to sidestep the limitations act (s.18).
my comment:
What happens when the indemnifier was a ‘wrongdoer?
Where the indemnifier is a ‘wrongdoer’, the oppression plaintiff must make sure that the indemnifier has been claimed against by the defendant in order to preserve the plaintiff’s future access to the indemnity policy.
