In Which Capacity Are You Acting?
Article originally published by Benefits Canada, May 5, 2008
"In Which Capacity Are You Acting?"
A recent decision of the Ontario Court of Appeal serves as a reminder that directors and officers may have different duties and obligations depending on the role they are fulfilling.
The case involves an ongoing action in respect of Slater Steel’s underfunded pension plans that has been brought against an actuary and an actuarial firm. The company itself is now bankrupt and the successor administrator, appointed by the Superintendent of Financial Services, has brought the action. The damages sought are in respect of the amount by which the Slater pension plans are underfunded. The plaintiffs allege that this underfunding was caused in part by improper actuarial reports that were prepared by the actuary, while employed by the actuarial firm. The plaintiffs claim that the actuary breached duties owed to the plan members by overstating the value of the assets in the pension plans, and thereby minimizing the contributions required by the company.
The actuary and the actuarial firm sought to institute third-party proceedings against certain former directors, officers and employees of Slater, from whom they allege instructions and information was received with respect to the actuarial reports. These individuals were members of the audit committee of the company, which is the committee that was delegated responsibility for the management and administration of the Slater pension plans by Slater, the plan administrator. The claims are being brought against these committee members individually, in their capacity as agents and employees of the administrator of the pension plan.
The former Slater directors, officers and employees objected to the third-party claims being brought on the basis that the proposed claims did not disclose a reasonable cause of action. The actuary and actuarial firm sought confirmation that the termination order given in the course of the prior bankruptcy-related proceedings did not apply to bar these claims. The termination order had provided that any person who had served as an officer or director during the relevant time was released and discharged from all claims in connection with such service, subject to certain limited exceptions.
The motions judge had dismissed the motion to include the third-party claims in the proceedings on the basis that they did not disclose a proper cause of action. This decision was based on the court’s conclusion that in order for the third-party action to be successful, there had to have been reasonable reliance by Slater. The Ontario Court of Appeal disagreed and concluded that the third-party claims do disclose a reasonable cause of action (which is the threshold test that was being determined at this stage of the proceedings). In reaching its decision, the Court of Appeal noted that it was not Slater that was bringing the action, but was instead the successor administrator. The successor administrator can pursue actions on behalf of the members and beneficiaries of the pension plan, as was the case here.
The Court of Appeal addressed the termination order and determined that the proposed third-party claims were not necessarily barred by this order. Specifically, the Court noted that the claims are not being brought against these persons in their capacity as directors and officers of Slater. Instead, the claims are being brought against them individually, in their capacity as agents and employees of the administrator of the pension plan. The fact that they were likely appointed to the audit committee because they were directors and officers does not change the fact that there were different duties associated with these different roles. The Court of Appeal noted that distinguishing between their roles as officers and directors and their roles as members of the audit committee administering the pension plans makes sense of the inherent conflicts of interest that otherwise would exist. As an example of a conflict of interest that otherwise would exist, the Court noted that as officers and directors of Slater, their duty would have led them to minimize as much as possible the contributions the company was required to make to the pension plans, given that the company was in financial difficulty. This is in contrast to their duty as agents for the administrator of the pension plans. In this role, there is a fiduciary duty to the plan members—there would have been a duty to maximize the company’s contributions to the pension plans to protect the interests of the members. The Court pointed out that this was particularly true in this case, when they likely knew that the company was in financial difficulty.
This decision essentially allows the third-party claims to proceed to trial along with the claims against the actuary and the actuarial firms. It is an ongoing matter to continue to watch.
This case is a reminder of the different duties that may arise depending on the role that an individual is fulfilling. Where a pension plan is involved, inherent conflicts of interest may arise for officers and directors who are also involved in the administration of the pension plan. In such cases, they must be aware of their fiduciary duties to plan members and ensure they are fulfilling them.
To view the article, please visit the Benefits Canada website.