Focus On

Corporations, Partnerships & Associations Law - Corporations - Directors and officers - Indemnification of directors and officers - Right to indemnity - Limitations

Thursday, September 08, 2016 @ 8:00 PM  

Appeal by Ayers and Adams from an indemnification order pursuant to s. 119(4) of the Business Corporations Act. Adams’ company, Eagle Eye Investments (Eagle Eye), commenced a debt action against CPC Networks (CPC) to obtain repayment of a loan. CPC counterclaimed and added the appellants as third parties, alleging a breach of fiduciary duties in their capacity as officers and directors of CPC. The debt action resulted in a judgment awarding Eagle Eye the full amount claimed. The third party claim was dismissed. The appellants accordingly sought indemnification from CPC for the costs of defending the third party proceedings. Adams claimed $453,702 for amounts paid to counsel, the interest costs of financing payment of his legal fees, and opportunity costs. Ayers, a lawyer, sought indemnification in the amount of $156,267, representing the cost of defending himself. Adams was granted partial indemnification of $157,477, as amounts paid to Ayers’ law office were disallowed. Ayers’ claim was refused in its entirety. A stay of enforcement of Adams’ indemnification was granted pending determination of further claims. Ayers and Adams appealed.

HELD: Appeal by Adams allowed in part. Appeal by Ayers dismissed. Adams’ claim for the costs of legal service provided by Ayers’ firm represented reasonably incurred legal expenses and interest costs in defending the third party claim. There was no suggestion by CPC that the accounts were excessive or unreasonable. The chambers judge took an unduly restrictive approach that overlooked the uncontested evidence that the accounts were rendered for work defending the claim against Adams. Adams was entitled to indemnification of the Ayers account plus associated interest and legal costs. Adams was not entitled to compensation for opportunity costs associated with the defence of the third party claim, as s. 119(4) did not provide for indemnification in relation to matters that did not involve an exchange of consideration. There was no basis for staying enforcement of the indemnification order. Adams was entitled to costs of the indemnification proceeding on a substantial indemnity basis. With respect to Ayers’ appeal, the fact that s. 119(4) of the Business Corporations Act did not contemplate indemnification for matters not involving an exchange of consideration precluded indemnification for the work conducted by Ayers in defending himself.