Directors held in contempt of court

It is relatively rare for British Columbia courts to hold directors or officers of a company in contempt for sins of the company. In Axion Ventures Inc. v. Bonner, 2023 BCSC 213, the BC Supreme Court did just that, holding a company’s directors in contempt for failing to abide by a court order.

The order that the defendants were accused of breaching required the defendants to place any company shares they held (it was not clear if the directors personally held shares) or controlled in trust, pending the results of the litigation. The defendants failed to do so, claiming that compliance with the order would put them in breach of their contractual obligations with their U.S. lender.  

The three-part test for civil contempt is: (a) the order alleged to have been breached must state clearly and unequivocally what should and should not be done; (b) the alleged breaching party must have had actual knowledge of the order, and (c) the party allegedly in breach must have intentionally done the act that the order prohibits or intentionally failed to do what the order compels.

The standard of proof for contempt is high and all three elements must be proven beyond a reasonable doubt and not a balance of probabilities.

The court determined Rule 22-8(2) allows for the enforcement of its order against any directors and officers found to be willfully disobeying that order. Directors and officers have a duty to do everything that is reasonable to ensure that company’s compliance with a court order. The intentions of a director or officer who is a directing mind may be considered when determining whether the company had the requisite mens rea to willfully disobey a court order.

While the court agreed that contempt of court is a “heavy, blunt tool” and should be a “last resort to obtaining compliance,” it nevertheless held the defendants in contempt. The court found that the defendants could not prove that compliance with the order would result in a breach. At best, the defendants could prove that compliance with the order may put its parent company in breach of its contractual obligations. 

While penalties for civil contempt are typically proportionate and are generally imposed with a view to enforcing compliance, jail time is an option. This decision is a powerful reminder of the risks that directors or officers could face if they fail to take all reasonable steps to ensure corporate compliance with court orders.

Latest word from Supreme Court of Canada on oppression

Does the failure of a company to follow the legal formalities in the Canada Business Corporations Act, R.S.C. 1985 c. C-44 (“CBCA”) constitute oppression?  The Supreme Court of Canada revisited the oppression remedy and concluded that it did not.

In Mennillo v. Intramodal Inc., 2016 SCC 51, the majority of the court outlined that the failure to follow certain formal requirements of the CBCA did not amount to oppression.  The petitioner, one of two shareholders in the respondent, claimed he was oppressed as he was frozen out of equity participation in the respondent. 

The trial judge concluded that the petitioner had agreed to remain a shareholder in the respondent so long as he guaranteed the respondent’s debts.  The petitioner subsequently decided to stop guaranteeing the debts, resigned as a director and agreed to transfer his shares to the respondent’s controlling shareholder.  Through an oversight of that shareholder’s lawyer, the appropriate paperwork was not completed to transfer the shares.

The affairs of the respondent company were “marked by extreme informality”.  The transfer of the petitioner’s shares was not completed in accordance with the express requirements of the CBCA, including the endorsement of the petitioner on his share certificate. 

However, even though those formalities were not complied with, the court found the petitioner had no reasonable expectation of being treated as a shareholder after agreeing to transfer his shares.  The respondent’s failure to complete the “corporate formalities” did not constitute oppression and did not “strip” the petitioner of his status as a shareholder. 

The decision reflected the equitable nature of the oppression remedy and that cases ought to be judged on the basis of business realities and not technicalities.  However, the majority did not state that non-compliance with corporate legislation will never lead to an oppression remedy.  A larger company, particularly one that is widely-traded, would likely be held to a higher standard with respect to adhering to corporate formalities than the company at issue in these proceedings.