The Ontario Superior Court has ruled that claims for professional misconduct can still be
brought against directors and officers despite a class action settlement and
release regarding the same situation. The settlement was part of Sino-Forest’s
Plan of Compromise and Reorganization following a bankruptcy triggered by
allegations of corporate fraud. This decision highlights the complexities of concurrent class action and regulatory
proceedings,
especially in the context of the CCAA.
Background
A securities class action against Sino-Forest
Corporation, its senior officers and directors, and others was commenced in
July 2011 after Sino-Forest filed for CCAA protection. In July 2014, the
Ontario Superior Court approved a settlement with a former CFO of the company,
which required payment of $5.6 million for the benefit of Sino-Forest’s
stakeholders and provided a release under the auspices of the CCAA. The notice
for the class action settlement was directed to all persons who acquired
Sino-Forest securities.
In June 2014, before the class action settlement was
approved, the CFO negotiated a separate settlement with the Ontario Securities
Commission. The OSC settlement required him to make admissions regarding
allegations that he failed to exercise the skill, care and diligence required
of him as CFO. At this point, the CFO’s counsel wrote to the Chartered
Professional Accountants of Ontario (CPAO) regarding the OSC settlement to
determine whether the CPAO would bring proceedings against the CFO. Counsel did
not mention the proposed class action settlement to the CPAO at this time.
The
Disciplinary Proceeding
In June 2015, after many months of discussions with
the CPAO, CFO’s counsel for the first time informed the CPAO that it was barred
from commencing disciplinary proceedings against the CFO by the class action
settlement order. The CPAO nevertheless commenced regulatory proceedings
alleging that the CFO breached the Rules of Professional Conduct established by
the Institute of Chartered Accountants of Ontario, including by failing to
perform his professional services with due care while he was CFO of
Sino-Forest. The CPAO is seeking a $75,000 fine and a two year suspension from
the practice of accounting.
Motion
to Halt the Disciplinary Proceedings
The CFO brought a motion before the Ontario Superior
Court for an order declaring that the CPAO’s allegations were released and
discharged pursuant to the class action settlement order and that it was
enjoined from bringing the disciplinary proceeding.
Justice Morawetz refused to grant this order. He found that the CPAO’s claim of
professional misconduct against the CFO did not give rise to any financial
claim against Sino-Forest or its officers and directors, in their capacities as
such, and was therefore not able to be compromised under the CCAA. The CPAO
allegations were with respect to the CFO’s professional conduct as a chartered
accountant, independent of his role as a director or CFO.
Moreover, Justice Morawetz found that the CFO “never
intended or understood that the regulatory powers of CPAO would be barred by
the settlements of the CCAA or the class proceedings.” If the CFO wanted the
release to be effective as against CPAO, “steps could have been taken to serve
CPAO.”
The class action settlement therefore did not affect
the right of the CPAO to bring, continue or prosecute allegations against the
CFO.
Implications
for Directors and Officers
This decision indicates that professional misconduct
proceedings brought against directors and officers may be commenced following settlements
in other matters unless specifically released. It also underscores the
importance of giving notice of a settlement to all parties intended to be bound
in order to ensure an enforceable full and final release.
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