The Saskatchewan Court of Appeal has recently ruled that a proposed class action against auditors for duties allegedly owed to corporate shareholders can survive a liquidation claim under Saskatchewan’s Business Corporations Act (the SK BCA).
Key takeaway
Although this is a decision of the Saskatchewan Court of Appeal, this ruling is likely to have strong persuasive value in other provinces, including Alberta, British Columbia and Ontario, as the Alberta Business Corporations Act (the AB BCA), the British Columbia Business Corporations Act (the BC BCA) and the Ontario Business Corporations Act (the ON BCA) contain very similar provisions to the SK BCA. For example, the AB BCA – like the SK BCA – only allows liquidators to bring, defend or take part in any civil, criminal or administrative action or proceeding in the name – and on behalf – of the corporation, and to settle or compromise any claims by or against the corporation.
Furthermore, the AB BCA permits the court to make orders determining the validity of any claims made against corporations and orders approving compromises of claims against corporations. To the extent that an action is commenced in Alberta against an auditor, and the action relates to the finances of a corporation in liquidation proceedings, it is likely that a failure by that plaintiff to engage in the liquidation claims proceeding will be an insufficient basis on which to seek dismissal of the claim.
Claims that directors, auditors and other third parties may have against the corporation are routinely stayed and dealt with in procedures under the Companies’ Creditors Arrangement Act, which is designed to deal with such claims expeditiously. The provisions of the SK BCA that formed the basis of the Court of Appeal’s interpretation are substantively identical to those in the Canada Business Corporations Act but have some differences when compared to the ON BCA. Even though the ON BCA, like other provincial statutes, primarily deals with claims against the corporation, Section 202 of the ON BCA is broader than the provisions of the SK BCA and gives the liquidator the power to address claims “against the corporation or whereby the corporation may be rendered liable.” Therefore, it will be interesting to see if the Ontario court feels equally restricted in their ability to address similar claims as part of the liquidation process.
The case and decision
In Koroluk v. KPMG Inc., 2022 SKCA 57 (Koroluk), Randy Koroluk was an investor in PrimeWest Mortgage Investment Corporation (PrimeWest) who commenced a proposed class action against former and present directors of PrimeWest and its auditor. The proposed class action alleged breaches of various duties owed to Mr. Koroluk and other shareholders by both the directors and the auditor. Subsequent to the issuance of the proposed class action, PrimeWest’s board of directors approved a plan for PrimeWest’s voluntary liquidation and dissolution pursuant to the provisions of the SK BCA (the Liquidation Plan).
The Liquidation Plan contemplated that the liquidator would pay or otherwise satisfy all proven claims from the assets of PrimeWest in accordance with a claims process and any court orders. The claims process approved by the Court required all persons having a claim to file proof of it with the liquidator, KPMG Inc., on or before March 10, 2020. Otherwise, that person would be barred from enforcing the claim.
Mr. Koroluk argued that the proposed class action was excluded from the liquidation proceedings because it sought damages only against the directors of PrimeWest and the auditor, not PrimeWest itself.
In ruling in favour of Mr. Koroluk, the Saskatchewan Court of Appeal found that the provisions of the SK BCA dealing with corporate liquidation and dissolution were designed to ensure that the corporation’s liabilities were identified and paid. They were not suited to the administration and resolution of claims made against persons other than the corporation under liquidation, such as a claim against someone who could claim against the company in liquidation (such as an auditor or PrimeWest’s directors). Furthermore, the Court determined that its broad authority to make orders did not extend to a power to order that a claim against a defendant be proven in liquidation simply because the defendant had a right to seek contribution or indemnity from the corporation.
If you have any questions about this decision and how it may impact your operations, please reach out to the authors Christy Lee, Mélanie Power or Deepshikha Dutt.
