Canada: Galantis v Alexiou: No Oppression After Dissolution

In Galantis v Alexious, [2019] UKPC 15 the Privy Council concluded that the oppression remedy existing under the Bahamian Companies Act cannot be invoked after the dissolution of a company, with respect to oppressive conduct by directors that occurred before the dissolution of the company.

The Bahamian Companies Act is based on the Canadian Business Corporations Act (the "CBCA") and the Privy Council relied almost exclusively on Canadian jurisprudence in reaching their conclusion. The decision is therefore likely to be of substantial persuasive weight in Canada.

The heart of the Privy Council's decision is that, while the Bahamian Companies Act includes a provision providing that the liability of the company and its directors shall "continue" following its dissolution, the oppression remedy is a discretionary and flexible power and therefore mere fact that a director faced the possibility of being subject to the oppression remedy at the time of dissolution did not give rise to a liability at that time which could be extended.

The decision will be of particular interest to creditors and security holders with potential oppression claims against a company in circumstances where the company is on the verge of bankruptcy. It provides a strong incentive to move for such a remedy as quickly as possible to avoid losing that potential relief. Similarly, the decision will be of interest to creditors who may have interests in a bankrupt company that compete with those of potential oppression claimants and may provide greater certainty to such creditors.

Facts

The respondent, Mr. Galantis sold his shares in a company to another company called "Ali-Cat Designs Ltd" in 1998. Mr. Antony Alexiou and Mr. Alexander Alexiou, the appellants, were the directors of Ali-Cat. Mr. Galantis received a lump sum and a promise that the remainder of the purchase price would be paid in installments pursuant to a promissory note.

In 1999, Ali-Cat defaulted on its obligations and, also in 1999, Mr. Galantis obtained a judgment for the outstanding balance with interest. The judgment was never paid.

In 2007, Mr. Galantis learned that one of the appellants had essentially converted the business that he had sold and transferred its assets to a third company, Bahama Republic Ltd., which operated on the first company's former premises.

In 2008 Ali-Cat was struck from the Bahamian register of companies, and in 2009 Mr. Galantis commenced an oppression claim against the former directors of Ali-Cat.

Legislation

Mr. Galantis advanced his claim under s. 280 of the Bahamian Companies Act, which reads:

This is essentially equivalent to s. 241 of the CBCA. There are slight differences in wording – for example the CBCA refers to conduct that is "unfairly prejudicial" instead of "unfairly oppressive" – but those differences are not significant to this case.

The Bahamian Companies Act also provided that the liability of the company and its directors continues following the removal of the company from the register of companies:

Analysis

The Privy Council, like all the lower courts in this case, had no difficulty concluding that s. 280 applied and that the appellants had engaged in oppressive conduct.

The judge at first instance held that the best interests of the company would have been to direct any profit or asset value towards the outstanding debt of the company (i.e., to Mr. Galantis). Similarly, she held that by opening a rival company while he still owed a duty to the company the director had engaged in oppressive conduct.

However, judge at first instance concluded that because the oppressive conduct all occurred before the company was struck off the register of companies there was no basis to make an oppression claim.

The Privy Council disagreed and held that the conduct which gives rise to oppression need not be continuing at the time of the application to the court. The Privy Council relied on the wording of s. 280(2) which referred to corporate affairs that "are or have been" conducted in an oppressive manner to conclude that the oppressive act need not be ongoing at the time the claim is brought. The Privy Council also relied on the Quebec Superior Court decision in Sparling v Javelin International Ltd, [1986] RJQ 1073 which came to the same conclusion.

However, while the conduct which gives rise to the oppression need not ongoing on the date the proceedings are commenced, the Privy Council concluded that the oppression itself must exist as of that date. The challenge in Galantis was that, on the date the oppression claim was commenced, the company had already been struck off the register of companies so the oppression could not be said to be ongoing.

The Court of Appeal had concluded on the basis of s. 272 of the Bahamian Companies Act that the liability of the directors for oppression survived the removal of the company from the register. The Privy Council disagreed.

The Privy Council concluded that s. 272 existed to ensure that directors could not cause a company to be dissolved so as to evade an existing personal liabilities as directors which existed as of the date of dissolution. However, the nature of the oppression remedy is fundamentally different from extant liability, and s. 272 does not extend liabilities that do not yet exist as of the date of dissolution.

The Privy Council relied on the decision of Cote J. in Wilson v Alharayeri, 2017 SCC 39 to conclude that the exercise of discretion is a pre-condition to any liability through the oppression remedy. Specifically, the oppression remedy turns on "equitable considerations" which vary depending on the facts of the case. That will, for example, include a consideration of the degree to which it is fair to assign liability to the director as opposed the company on all of the facts including the bad faith of the director or personal benefit to the director.

Because those discretionary considerations are a pre-condition to liability, s. 280 does not impose any liability "until such time as the court exercises its discretion under section 280". Thus there is no liability as of the date of dissolution and under s. 272 an applicant "cannot enforce the possibility than an order will be made in the future".

The Privy Council further relied on the decision of Cote J in Wilson to conclude that the outcome may depend, for example, on the number of creditors and whether it is appropriate to allow a remedy against directors under s. 280 in favour of some creditors at the expense of others.

Thus the Privy Council concluded that "section 280... do[es] not create a cause of action as such but a jurisdiction or power in the court which an applicant can invoke with a view to the court's exercising its power to grant him relief". Thus, Mr. Galantis could not bring his claim.

Implications

Canadian litigants should be cautious to avoid the situation in which Mr. Galantis found himself through his delay in bringing an oppression claim. The Privy Council clearly believed that he had a potentially meritorious oppression claim. But he had delayed until after the relevant company had been struck off the register. By that time it was too late to bring the oppression claim because the company no longer existed and the oppression claim was not an extant liability that could be extended by statute (although the Privy Council did note that he could have applied for an order to restore the company and then bring a derivative action, but he did not).

The principle from Galantis that an oppression claim is simply a power in the court to grant relief, rather than a liability, will be persuasive authority in Canada (being from a highly respected Court and being itself largely based on Canadian jurisprudence) and will be significant in any cases involving the potential dissolution of a corporation. Litigants with potential oppression claims would be well advised to consider bring their claims quickly, to ensure that changes to corporate status (not limited to dissolution, but also including insolvency or corporate restructuring) do not defeat their claims (or create procedural complications such as the need to restore a corporation to bring a claim). By contrast, creditors who lack an oppression remedy may want to rely on Galantis to defeat claims by other creditors who can advance an oppression claim.

In short, because a potential oppression claim may be held to be a mere power to grant relief – rather than a liability – it is important that the claim be brought as soon as possible to transform it into a true liability which has a greater chance of surviving major changes to the corporation. Given that such claims are often (although not exclusively) necessary when corporations face bankruptcy or other trouble (as solvent companies are typically more likely to meet their obligations), such diligence will frequently be prudent.

Case Information

Galantis v Alexious, [2019] UKPC 15

Docket: 0077 of 2017

Date of Decision: April 8, 2019

To view the original article click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.