Audit, Compliance and Risk Blog

Super Priority Charge Over Insolvent Corporation’s Assets Despite Existing Insurance Coverage

Posted by Ron Davis on Tue, Mar 01, 2016

Ontario_court.jpgThe Ontario Superior Court of Justice issued an initial order in an insolvency proceeding under the Companies’ Creditors Arrangement Act (CCAA) providing a $3.1 million director’s charge even though the directors were covered by an existing D&O liability insurance policy and indemnities from the company (Re P.T. Holdco Inc., 2016 ONSC 495). The CCAA proceedings involved various corporate entities involved in the Primus telecommunications service business in Canada and the United States. Primus’ business was failing and it had arranged to sell its business to another company and wished to use the CCAA to finalize the sale and distribute the sale assets while its creditors were stayed from enforcing their claims.

The CCAA contains provisions that authorize the supervising court to grant orders if it believes they are necessary. Among the orders it can grant are orders that give certain claims a priority over all of the rest of the claims on the assets. Among the specific charges a court can grant is a director’s charge under s. 11.51 of the CCAA. The charge indemnifies the directors for any obligations and liabilities that “they may incur as a director or officer of the company after the commencement of proceedings under this Act.” The court may order that the charge has priority over any other claim against the corporation’s assets, provided notice has been given to those secured creditors likely to be affected by such an order (CCAA, ss. 11.51(1) & (2)). However, the court may not make such an order if it is of the opinion that “the company could obtain adequate indemnification insurance for the director or officer at a reasonable cost” (CCAA, s. 11.51(3)).

In the case of Holdco, the directors had indemnities from the company and a $15 million directors’ liability insurance policy. However, the court noted that the indemnities were not useful if the directors were liable for the full amount of potential liabilities because the company would not have assets to pay the indemnity. In the case of the insurance policy the court found that “there are deductibles for certain claims and a large number of exclusions which create a degree of uncertainty” with respect to the coverage provided and that alternate adequate insurance was not otherwise available at a reasonable cost. Since the court was of the opinion that adequate insurance was not in place, and that the directors were necessary to complete the sale process, it decided to grant the order giving priority over all claims except the charge for the fees of professional service providers to the $3.1 million charge indemnifying the directors for claims arising from their performance of their duties after the commencement of the insolvency proceedings.

Directors can mitigate their risks from continuing to serve as directors after the commencement of insolvency proceedings either through an adequate insurance policy or through an indemnity given priority over most other claims against the company’s assets by an order of the court. Even where there is an insurance policy in place, it should be reviewed carefully to ensure it provides sufficient coverage for potential liabilities arising after the insolvency proceeding commences. If it does not, a director’s charge order should be sought at the earliest opportunity, preferably in the initial order of the supervising court.

STP publishes Directors' Liability in Canada and also produces the following related guides:

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About the Author

Ronald Davis is an associate professor emeritus at the Peter A. Allard School of Law, University of British Columbia. He obtained his Bachelor of Laws degree from the Faculty of Law, University of Toronto in 1990, graduating as that year’s silver medalist. He was called to the Ontario Bar and practiced law in Toronto for 10 years before returning to graduate studies at the University of Toronto. See for a full bio of Ronald Davis.

Tags: Corporate Governance, Insurance, Canadian, directors, directors & officers