In Brunette v. Legault Joly Thiffault, s.e.n.c.r.l., 2018 SCC 55, the Supreme Court reaffirmed that shareholders have no right of action for faults committed against the corporation in which they hold shares.
Facts
Fiducie Maynard 2004 (“Fiducie”), was the sole shareholder of 9143‑1304 Québec Inc., a holding company that controlled, wholly or partially, the companies that made up Groupe Melior, which renovated and operated seniors’ residences prior to 2010.
Following the bankruptcy of most of the Groupe Melior companies as well as the holding company, the trustees of Fiducie brought an action to recover the loss in value of the trust’s patrimony from a group of lawyers and accountants on the grounds that they had committed a certain number of professional faults in setting up the tax structure of Groupe Melior.
In trial division, the lawyers and accountants filed a motion to dismiss the action due to the lack of a sufficient interest, under Section 165(3) of the Code of Civil Procedure (“C.C.P.”), which the Superior Court granted.
As for the Court of Appeal, it unanimously concurred with the trial judge’s opinion and confirmed the dismissal of the claim due to the lack of a sufficient interest.
The case was then brought before the Supreme Court. With this appeal, the Supreme Court was called upon to reaffirm the rules of standing under the C.C.P. and the distinct legal personality of corporations.
Inadmissibility of a Remedy in the Absence of a Sufficient Interest to Act
In its decision, the Supreme Court reminded that an exception to dismiss under Section 165(3) C.C.P. would only succeed if the plaintiff clearly has no interest. It is well known that at the preliminary stage the courts are called upon to act with prudence before dismissing a claim on that basis. That being said, sufficient interest is a condition of admissibility that applies to all claims, and the courts must be able to establish its existence and dismiss claims when the alleged interest is insufficient. The Supreme Court majority underlined moreover that given the scarcity of judicial resources, the courts must be able to preliminarily dismiss claims that are manifestly unfounded. Accordingly, the question of the plaintiff’s sufficient interest must be determinable at the stage of the preliminary motions without the courts having to decide whether the claim is well founded in law. The sufficient interest of a plaintiff must therefore be examined before the merits of the case.
Section 85 C.C.P. states the basic rule of standing in Quebec. The legal interest required to act must be a direct, personal, acquired, and existing interest. In the framework of an action for civil liability, the Supreme Court reminds us that the principle stated in Bou Malhab v. Diffusion Métromédia CMR inc., 2011 SCC 9, para. 44, whereby “to have the necessary interest to bring an action, a person must have sustained personal injury,” is still current.
In the present case, it was up to Fiducie to adduce the necessary facts to demonstrate the sufficiency of its legal interest to claim damages in civil liability from the professionals.
Do the Shareholders Have a Right of Action in Respect of the Faults Committed Against the Corporation in Which They Hold Shares?
In Quebec civil law, shareholders do not have a right of action arising from the faults committed against a corporation in which they hold shares. Section 292 of the Civil Code of Québec recognizes that legal persons, such as corporations, have a distinct legal personality. Accordingly, it is the corporation itself that has the capacity to act in its own name in order to exercise its rights of action, with the corollary that the shareholders cannot personally exercise a right of action that belongs to the corporation as such.
In Houle v. Canadian National Bank, 1990 3 S.C.R. 122, the Supreme Court recognized that shareholders can, in certain circumstances, have their own right of action against the same defendant as a corporation might prosecute if they can establish:
- That the defendant breached a distinct obligation owed to the shareholders; and
- That this breach caused them indirect injury, independent from that suffered by the corporation;
The Supreme Court recalled that it has not created any exceptions to the general rule according to which shareholders may have an independent right of action when they establish the essential elements of civil liability distinctly from the fault committed against the corporation and the injury caused to the corporation.
In Brunette, supra, the trustees did not succeed in demonstrating that Fiducie had an independent cause of action for civil liability against the professionals. Thus, a shareholder cannot personally bring an action against third parties based on a right of action belonging to the corporation in which it holds shares. This stems from the fact that it would be incoherent for the shareholders to benefit from limited liability while at the same time obtaining a right of action in respect of the faults committed against the corporation in which they hold shares. The corporate veil is impermeable on both sides. Just as the shareholders cannot be held liable for the faults committed by the corporation, they cannot reciprocally seek damages for faults committed against the corporation.
Conclusion
The principles of procedural law and corporate law in Quebec prevent shareholders from exercising rights of action belonging to the corporations in which they hold shares. The shareholders of a corporation can only bring suit if they can demonstrate:
- The breach of a distinct obligation owed to the shareholders; and
- Direct injury that is distinct from the injury suffered by the corporations in which they hold shares.
These criteria reflect the essential principles of civil liability under the C.C.P. and only allow shareholders that have a direct and personal interest to claim damages from third-party defendants.
As an aside, the Supreme Court reiterates that the shareholders can ensure that a corporation exercises its rights by instituting a derivative action on behalf of the corporation as provided for in section 239 and following of the Canada Business Corporations Act and section 445 of the Business Corporations Act (Quebec).
Recent application in Godard v. Godard
Recently, the Superior Court, in Godard v. Godard, 2019 QCCS 602, applied the principles stated in Brunette, supra, and dismissed the action of a plaintiff who had instituted an action in rectification of abuse of power or iniquity under section 450 of the Business Corporations Act (Quebec), commonly known as an oppression remedy. The Superior Court dismissed the action by a plaintiff shareholder on the ground that he had neither established that he had a personal interest to sue the corporation nor had he obtained authorization to do so on behalf of the corporation in which he held shares under section 445 of the Business Corporations Act (Quebec), which was fatal to his remedy.