Ontario Civil


Bankruptcy and Insolvency

Companies’ Creditors Arrangement Act

Arrangements

Prohibition against directors communicating with auditor not binding

On November 24, 2014, plaintiff C Inc. commenced litigation against multiple defendants, including its former auditor, LLP, as well as C Inc.’s former directors and officers. C Inc. alleged that K LLP committed auditor’s negligence concerning preparation of its financial statements for 2011 through 2013. In 2015, C Inc. negotiated global settlement to resolve 22 pieces of litigation brought by and against it, including resolution of C Inc.’s claim against its former directors and officers. As debtor under Companies’ Creditors Arrangement Act (“CCAA”), C Inc. required approval of court to enter into global settlement. Global settlement was centerpiece of C Inc.’s plan of compromise and arrangement under CCAA. C Inc. required approval of its plan of compromise and arrangement by both its creditors and court under statute. Former directors’ contractual obligation to refuse to speak to K LLP was contained in side letter agreement that was part of global settlement of litigation that was centerpiece of plan of compromise and arrangement of C Inc. under Companies’ Creditors Arrangement Act (“CCAA”). C Inc. did not disclose side letter agreement to K LLP, creditors, or to court in CCAA plan approval process. K LLP brought motion for order relieving former members of board of directors of C Inc. (or its predecessor) of their contractual obligation to refuse to “cooperate with, meet with or talk to” K LLP concerning this litigation except under compulsion of court order or summons to witness. Motion granted. Prohibition against communicating with K LLLP contained in undisclosed side letter agreement was not binding on former directors of C Inc.. C Inc. required approval of court to enter into side letter agreement. As it did not disclose side letter agreement to its creditors, K LLP, or to court, C Inc. thereby failed to obtain required court approval to agree to side letter agreement. As such, C Inc. lacked authority to enter into impugned term in side letter agreement and could not rely upon it. Disclosure to interested parties and to court of terms for which approval is sought or mandated is minimum requirement. CCAA debtors are supervised by court under watchful eyes of their creditors and other interested parties. Transparency is part of quid pro quo that comes with enjoying protections of CCAA.

1511419 Ontario Inc. v. KPMG LLP (2017), 2017 CarswellOnt 5770, 2017 ONSC 2472, F.L. Myers J. (Ont. S.C.J. [Commercial List]).

 


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