The Oppression Remedy: What Creditors Need to Know
You've done the work or provided the goods, but payment is nowhere in sight. Then you hear that the company's directors are shuffling assets to shell corporations or paying themselves massive bonuses, leaving the company unable to pay its bills, including yours. In Ontario, there is a powerful legal tool that can be used to combat this kind of corporate misbehaviour: the oppression remedy.
While the remedy is primarily a shield for a company's shareholders, directors, and officers, it is less clear whether a creditor is entitled to, or has legal standing, to advance an oppression claim. The answer, according to recent Ontario jurisprudence, is maybe, and it largely depends on the type of debt owed.The Oppression Remedy: A (Very Brief) Introduction
Under Ontario's Business Corporations Act (“OBCA”), the oppression remedy is a flexible and potent tool a court can use when a corporation's actions are "oppressive, unfairly prejudicial, or unfairly disregard the interests" of certain people. If a court agrees that a company has acted in an oppressive manner, it can issue a wide range of remedial orders.
To seek this remedy, you must first qualify as a "complainant". The OBCA’s definition of a complainant includes shareholders, directors, and officers. However, it also includes a crucial residual category, namely, "any other person who, in the discretion of the court, is a proper person to make an application". This is the narrow door through which a creditor must pass.
The Creditor's Challenge: Getting a Foot in the Door
Courts have consistently made clear that creditors are not automatically considered complainants and are wary of creditors who attempt to weaponize the oppression remedy to facilitate debt collection. Instead, a creditor must convince the court that they are a “proper person” to bring a claim.
When deciding whether to grant legal standing as a “proper person,” courts weigh several factors, including the remoteness (or directness) of the creditor’s legal interests in the corporation, whether the creditor is acting in good faith, and whether the creditor’s legal interests are vulnerable to corporate maneuvering against which they could not effectively protect themselves. The crucial factor in this analysis, however, appears to be whether the individual was a creditor at the time that the alleged oppressive conduct occurred.
Creditors who have already obtained a court judgment for a specific amount against a corporation, known as judgment creditors, are generally considered to be “proper persons” and have standing to bring an oppression claim. For example, courts have permitted judgment creditors to advance oppression claims when a director has stripped the debtor company of its assets, rendering it unable to satisfy the judgment, or when the corporation makes large payments to its shareholders in preference to a creditor. In each of these situations, the judgment creditor’s interest is clear and quantifiable and gives rise to a reasonable expectation that the company would refrain from conduct that hinders repayment.
The situation is more complex for potential or contingent creditors, namely, those who may become creditors in the future, for example, if they win a lawsuit for yet-to-be-quantified damages. Generally, a person with only a contingent interest in a claim for unliquidated damages is not considered a creditor for the purpose of bringing an oppression claim. Courts are hesitant to grant standing to these kinds of creditors because the remedy is not intended to be a shortcut for a litigant to obtain de facto execution on a debt claim (see Torres v. MGL Properties Ltd.).
Similarly, if a person’s status as a potential creditor arises from the very oppressive conduct they are complaining about, they may not have standing. The core issue is one of timing and logic. Courts have repeatedly emphasized that it is “unsatisfactorily circular” to allow someone to be considered a creditor-complainant by first proving oppressive conduct that creates creditor status, and then using that status to claim oppression. Instead, to be a proper complainant, the person must already be a creditor at the time of the alleged oppression.
Other Available Remedies
What can be done if a debtor corporation is actively dissipating or removing assets while a lawsuit is pending and the oppression remedy is unavailable? Other legal remedies may be available to prevent such conduct. One such tool is the Mareva injunction, which has the practical effect of freezing a debtor corporation’s assets to prevent their depletion or removal before a judgment can be obtained.
The Bottom Line
The oppression remedy is not intended to protect creditors from financial risk that they willingly assumed, through a debt contract or otherwise. Instead, it is intended to protect a creditor’s legal interests against “unlawful and internal corporate manoeuvres” that they could not effectively protect themselves against, including fraudulent preferences and transfers to other stakeholders.
Ultimately, while the remedy may be employed as a shield to protect a creditor’s legitimate interest in a corporation against unfair internal maneuvers which oppress, disregard, or prejudice such interest, courts remain vigilant in ensuring that it is not misused as a sword in routine debt collection disputes.
HOW WE CAN HELP
RAR Litigation has experience representing creditors in complex commercial disputes. Our lawyers can help you assess whether the oppression remedy or other legal strategies are available to protect your interests and recover what you are owed.
Contact us to discuss how RAR Litigation can support you and your business.