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CORPORATIONS - Indemnification of directors and officers - Advance of costs

Tuesday, April 20, 2021 @ 6:23 AM  

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Appeal by the defendants, Quershi and Wong, from an order refusing an interim advance of legal costs from the plaintiffs, the Enliven companies. The defendants were former officers of Enliven who started and operated the business. They remained directors and shareholders. The Enliven companies alleged that the defendants committed a wide range of torts, including breach of fiduciary duty, fraud, deceit, unjust enrichment and negligence. In a separate, parallel action, Enliven’s other shareholders sued the defendants alleging a deceptive pump and dump scheme to obtain investment funds. The defendants applied for an interim advance of $200,000 to pay for their legal costs of defending the actions. They relied upon the companies’ bylaws and s. 124 of the Canada Business Corporations Act (CBCA). The chambers judge found no entitlement to the advance sought. No such advance was mandatory under s. 124. To the extent that the bylaws entitled the defendants to an advance, they were displaced by the indemnity provisions in the Unanimous Shareholder Agreement (USA). In addition, the strong prima facie case of fraud rebutted any presumption of good faith and disentitled the defendants to an advance of costs. The defendants appealed.

HELD: Appeal dismissed. Under s. 124 of the CBCA, an advance of legal costs was permissive, and did not oblige the companies to make any such advance. There was no ambiguity in the bylaws or the USA. Under the companies’ bylaws, subject to the USA and a good faith requirement, the defendants had a prima facie entitlement to the advance sought. The chambers judge did not commit a palpable and overriding error in concluding that the USA superseded the bylaws in respect of indemnity rights and obligations. Under the USA, there was no obligation to make an advance payment of legal costs to the defendants. The defendants’ application was properly dismissed.

Enliven Holdings Inc. v. Qureshi, [2021] B.C.J. No. 312, British Columbia Court of Appeal, E.A. Bennett, G.B. Butler and J.C. Grauer JJ.A., February 23, 2021. Digest No. TLD-April192021004