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High Court Clarifies Directors' Duties To Creditors

The denizens of Canada's financial districts ended the workweek feeling upbeat on Oct. 29, 2004. Earlier that day, the Supreme Court of Canada announced its eagerly awaited decision in Peoples Department Stores Inc. v. Wise, and the initial reports had been promising.

According to the Canadian business press, the high court ruled that directors and officers do not owe a fiduciary duty to a corporation's creditors, even when the company is insolvent or on the verge of insolvency. The suit sought to show that Section 122(1)(a) of the Canada Business Corporations Act (CBCA), which requires directors to "act honestly and in good faith with a view to the best interests of the corporation," created a duty to creditors.

Unfortunately for the family-controlled enterprise, the giant American retailer Wal-Mart entered the Canadian market in 1994, intensifying the competition with its acquisition of 100 Woolco stores from Woolworth Canada Inc.

Wise's finances deteriorated, and Peoples--albeit under financial pressure itself--extended increasingly larger amounts of trade credit to Wise under the joint procurement program. By June 1994 Wise owed Peoples $15 million.

On the facts in Peoples, the Wise brothers hadn't breached their statutory duty of care.

"We agree with the Court of Appeal that the implementation of the new [procurement] policy was a reasonable business decision that was made with a view to rectifying a serious and urgent business problem in which no solution may have been possible," the court wrote.

The research group interviewed 680 individuals who were responsible for investor relations at their companies in Canada. Forty-eight percent of respondents cited governance compliance as having the greatest effect on their business. Growth and survival issues, which ranked second, got the nod from only 11 percent of those surveyed.

Respondents pointed to increased workloads, additional costs, larger staffs and a greater need for professional guidance as some of the key consequences of the changing governance requirements.


Julius Melnitzer

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