Insolvency proceedings arise due to financial difficulties involving either individuals or businesses, and are characterized by an inability to repay debts as they become due. While personal indemnity agreements and personal guarantees are common undertakings in commercial agreements, whether they remain enforceable in CCAA proceedings is a common dispute. The Court held that in this case, individual directors’ indemnity agreements remained enforceable, despite release language contained in a court order in the company’s CCAA proceedings.
A recent decision from the Newfoundland and Labrador Supreme Court serves as an important reminder that insolvency-related release provisions do not necessarily extinguish personal contractual obligations. In the context of a Companies’ Creditors Arrangement Act (CCAA) proceeding, the Court considered whether an Approval and Vesting Order (AVO) releasing certain parties from liability also shielded an individual who had signed a personal indemnity agreement in support of corporate surety bonds.
The dispute arose after Intact sought recovery for amounts paid under various surety bonds following the default of Edward Collins Contracting. In addition to claims against the corporate entities involved in the insolvency proceedings, Intact pursued Edward Collins personally under a separate indemnity agreement he had signed as a condition of Intact issuing the bonds.
During the underlying CCAA proceedings, the Court granted an AVO approving the sale of the debtor companies’ assets and releasing specified parties from liability. Collins argued that the release provisions extended to him personally and barred Intact’s claim. Relying on the AVO, Collins brought an application to strike the action, asserting that the claim disclosed no reasonable cause of action and amounted to an abuse of process.
Legal Principals
Similar to other provinces, the Rules of the Supreme Court of Newfoundland and Labrador allow for a pleading to be struck in accordance with Rule 14.24. Collins specifically relied on subsections permitting a pleading to be struck where it does not disclose a reasonable cause of action or is otherwise an abuse of the Court process.
The test for whether a pleading should be struck on the basis that it discloses no cause of action asks whether the claim discloses a “plain and obvious” cause of action. The underlying assumption is that the facts in the pleading are true. The test is stringent, so that cases may proceed to a determination on their merits rather than being derailed on a technicality.
Collins also argued that Intact’s claim should be struck as an abuse of the Court process. This aspect of Collins’ application relied on the doctrine of res judicata, which provides that where an issue has been finally decided, it cannot be relitigated. Collins relied on this principle, arguing that because the AVO included release provisions, allowing Intact’s claim to proceed would breach this doctrine.
What the Court Said
The Court considered the AVO issued in the previous CCAA proceedings. Specifically, the wording of the AVO included a statement that no release would be permitted if it contravened a specific provision of the CCAA. Section 5.1(2) of the CCAA preserves the contractual rights of creditors.
Further, the Court relied on case law establishing a consistent interpretation of section 5.1(2) of the CCAA as excluding personal guarantees and personal indemnities from release. The Court noted that these obligations arise from independent contracts and are not captured by release provisions in Court orders such as the AVO at issue in this decision.
The Court also relied on the oral reasons of Justice MacDonald, who granted the AVO. In those reasons, the release was described as not extending to anyone in the “Collins family in their personal capacity.” In other words, Justice MacDonald explicitly did not adjudicate the merits of Collins’ personal contractual obligations to Intact.
Accordingly, the Court dismissed Collins’ application to strike the claim against him. The Court noted that the release in the AVO was not intended to extend to Collins’ personal contractual obligations.
Takeaways for Creditors + Debtors
Thorough and precise contract drafting, along with sound insolvency advice, is vital for parties seeking to understand both their rights and obligations in CCAA proceedings. Specifically, parties should keep in mind:
Despite the insolvency of a corporation, any personal indemnity agreements granted by individuals involved may persist notwithstanding Court orders containing release provisions within the CCAA proceedings.
The test for striking a pleading—particularly on the basis that it discloses no cause of action—is stringent.
Similarly, the doctrine of res judicata is applied flexibly and with caution, particularly where the alleged prior determination occurred in a different statutory context.
Understanding the details of complex commercial contracts is essential in avoiding unnecessary legal disputes. Contact Anthony Burden in Calgary, Jeremy Taylor in Edmonton, or any member of Field Law’s Litigation Group with questions or for advice.
