Corporate Reimbursement of the Legal Expenses of Former Directors
In Med-Chem Health Care Ltd. v. Misir (2010), 103 O.R. (3d) 769, the Ontario Court of Appeal agreed with the motion judge’s decision requiring a corporation to provide an indemnity to former directors for legal costs. The former directors were defending themselves against an action brought by a shareholder of the corporation (by way of a derivative action). It was alleged that the former directors and a secured lender had breached their duties of care to the corporation, causing the company to file for bankruptcy.
The appellant company agreed that it was obligated to provide an indemnity to the former directors under its By-laws and Section 136 of the Ontario Business Corporations Act. However, it argued that its obligation to pay legal fees did not arise until after the conclusion of the lawsuit. The action was still at the pleadings stage. The former directors sought an order requiring the company to advance an indemnity for legal fees from time to time.
Justice Goudge for the Court of Appeal stated, in part:
Section 136(2) of the OBCA allows the corporation (subject to a specified repayment condition) to pay advances of the legal expenses that the corporation may indemnify under s. 136(1). More importantly, s. 136(4.1), under which these proceedings are brought, allows the corporation to do the same (with the court’s approval), if the action is brought by or on behalf of the corporation itself and the individuals are made parties to it by virtue of their association with the corporation. Thus, s. 136 provides for advancement of the same legal costs, charges and expenses that may be indemnified by the corporation. In short, the legislature has made advancement a part of the statutory indemnification scheme, recognizing the reality that requiring an individual to fund his or her costs of litigation until its conclusion before being provided with indemnification would seriously impair the objective of indemnification itself.
From a directors’ and officers’ insurance perspective, the decision is interesting because the Court of Appeal expressly rejected the appellant’s argument that the motions judge should have considered whether there was proof of an inability on the part of the former directors to pay for the litigation without the advances and, in particular, the presence of insurance to fund the former directors’ defence.