December 19, 2018

Supreme Court of Canada reminds parties not to chase pipe dreams

The Supreme Court of Canada has again confirmed that shareholders do not possess a right of action in relation to faults committed against the corporation in which they hold shares. Sufficient interest is necessary at the originating application stage.

These are the principles that may be derived from the Supreme Court’s decision in Brunette v. Legault Joly Thiffault, s.e.n.c.r.l.

This case arose in the aftermath of Groupe Melior’s financial meltdown. In late 2009, essentially further to the discovery of problems with its parent company’s tax structure, Groupe Melior experienced serious difficulties that ultimately led to its bankruptcy. Then, its principal shareholder, Fiducie Maynard (the “Trust”), suffered the complete loss of the value of its patrimony. To recover this loss, the trustees brought an action against the lawyers and accountants who had established the Group’s tax structure. In 2015, the Superior Court dismissed that action at the preliminary stage on the ground that the Trust did not have sufficient interest to bring the action. In 2017, the Court of Appeal confirmed that judgment in a unanimous ruling.

Although the applicable legal principles are not particularly contentious, the Supreme Court agreed to hear the case. In a ruling written by Rowe J., the Court confirmed the lower court decisions. Justice Rowe conducted a detailed analysis of the concept of “sufficient interest” required for an action to be admissible under the Quebec Code of Civil Procedure. In his view, this issue must be capable of determination at the stage of preliminary motions, without requiring an analysis of the merits of the case. The burden of proof of demonstrating such interest is of course on the plaintiff.

Justice Rowe found that, in this case, such interest was lacking under the substantive rules of Quebec corporate law. In accordance with the Court’s judgment in Houle, he cited the principles of distinct legal personality of legal persons (para. 25 et seq.), particularly the requirement of a distinct fault resulting in a distinct injury for the shareholders (para. 29 et seq.), and dismissed the action of the shareholders, who had not established either in the originating application. According to the Court, the plaintiffs did not establish the breach of any legal obligations owed to them resulting in a distinct injury in their regard. While the result may seem harsh at this stage of the proceedings, it nevertheless remains consistent with the traditional state of the law.

Finally, the decisive factor seems to be set out in the last paragraphs of the majority opinion emphasizing the potential for wasting judicial resources on hopeless claims (paras. 48 and 49). In this regard, it is worth repeating the concerns expressed in the dissenting opinion of Coté J., who stated that “[t]here is nothing trivial about dismissing an action before the plaintiff has even had an opportunity to be heard on the merits” (para. 55).