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Oppression Remedy & Creditors

2 minute read

As we have discussed before, the oppression remedy is a potentially powerful tool, which can be used in a range of circumstances by a variety of corporate stakeholders, including shareholders, directors and officers, and secured and unsecured creditors.

While the oppression remedy is usually understood as and is typically used for protecting a corporation's minority shareholders, section 241 of the Ontario Business Corporations Act permits that a “complainant” can include “any other person who, in the discretion of the court, is a proper person to make an application” to commence an oppression action.

Section 241 has been interpreted to include creditors, where a creditor demonstrates that it had a reasonable expectation of being treated fairly which was violated by corporate actions that were oppressive to the creditor's interest.

Key to a creditor's assertion of a claim for oppression is its expectations of its relationship with the corporation. Determining whether a creditor had a “reasonable expectation” of fairness requires a fact-based inquiry, with consideration given to the relationship between the parties and general commercial practice.

Once the creditor has established a reasonable expectation of fairness, it must demonstrate that the corporation's failure to meet this expectation caused detrimental consequences that amount to "oppression," "unfair prejudice," or "unfair disregard" of its interest.

In the case of Sidaplex-Plastic Supplies Inc. v. Elta Group Inc., a creditor brought a successful claim for oppression against a corporation arising from a personal guarantee given to it by the corporation's principal (the corporation's sole director and shareholder). In that case, the creditor used a reasonable expectations analysis to persuade the court that its interests had been unfairly prejudiced or unfairly disregarded when the principal had let the guarantee lapse.

Not all harmful conduct, however, will give rise to a remedy. As the Supreme Court held in BCE Inc. v. 1976 Debentureholders, the creditor must prove that the impugned conduct was the legal cause of the alleged harm. In that case, a group of investors that held a series of debentures issued by an affiliate of BCE objected to a leveraged buyout of the company, arguing that BCE's failure to protect the value of their debentures during the buyout constituted oppressive conduct. Although the Supreme Court found that BCE was required to take its creditors' interests into account and that the creditors had standing to assert a claim in oppression, the claim ultimately failed on the issue of causation.

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