Accounting Expert Should Stick to His Knitting

Transcription

Accounting Expert Should Stick to His Knitting
Volume 7, Issue 11 — November 2012
Accounting Expert Should Stick to His Knitting
The Ontario Superior Court of Justice dismisses a proposed class action based on
secondary market misrepresentation, pursuant to the Securities Act of Ontario.
The Ontario Superior Court of Justice recently released a decision which is interesting
from a number of points of view. Firstly it
considers the requirements for obtaining
leave to commence an action for secondary
market misrepresentation under the Securities
Act of Ontario. Secondly it considers a number of accounting principles, including the
requirements for a going concern note. Thirdly it highlights the importance of an expert
witness maintaining independence and objectivity.
Western Coal Corporation (―WCC‖) is a
British Columbia company involved in coal
mining in that province. It is listed on the
Toronto Stock Exchange and subject to continuous disclosure obligations under the Securities Act of Ontario as well as to the civil
liability provisions for secondary market
misrepresentation contained in that statute.
Wayne Gould owned WCC Debentures with
a value of about $100,000. They paid 7.5%
interest and were convertible to common
shares at $4.00. On November 14, 2007
WCC announced its results for the second
quarter which ended on September 30, 2007.
The next day the Globe and Mail newspaper
published an article which stated that ―…
Western Canadian Coal said the soaring
loonie, low coal prices and operational issues
had pushed it to the brink of collapse‖. Gould
sold his holdings in WCC and sustained a
capital loss of about $30,000. About a week
later, Gould learned that a group of investors
led by Audley Capital Management Limited
and Audley Advisors LLP (―the Audley Defendants‖) were providing a capital infusion
to WCC. He also learned that some of the
directors and officers of WCC had purchased
―significant amounts of shares‖ shortly be-
fore the announcement of the Audley financing. He concluded that the Audley financing
must have been arranged well before the Q2
results were announced and that the gloomy
forecast in the financial statements was made
deliberately for the purpose of supressing the
share price and enabling insiders to purchase
shares at a low price. He sought to commence
a class action on behalf of all persons who
held or disposed of WCC‘s shares during the
―misrepresentation class period‖ being from
November 14, 2007, when the Q2 financial
statements were released, to December 10,
2007 when the Audley financing was confirmed, as well as the ―oppression class period‖, being the period April 16, 2007 to July
13, 2009.
The Plaintiff asserted three claims, being a)
an action for misrepresentation in the secondary securities market under part XXIII.1 of
the Securities Act; and b) a claim against
some of the defendants for conspiracy; and c)
a claim for oppression under the British Columbia Business Corporations Act. Section
138.3 of the Securities Act confers a cause of
action for misrepresentation in the secondary
securities market in favour of a person who
acquires, or disposes of, the issuer‘s securities between the release of the document
containing the misrepresentation and the time
the misrepresentation was publically corrected, regardless of whether or not the plaintiff
actually relied on the misrepresentation.
However, no action may be commenced under section 138.3 without leave of the court
and leave will only be granted where the
court is satisfied that: a) the action is brought
in good faith; and b) there is a reasonable
possibility that the action will be resolved at
trial in favour of the plaintiff.
Inside This Issue
Accounting Expert Should Stick
to His Knitting····················· 1
Insured Controls Litigation Until
Indemnified ························ 3
Fire as Incidental Peril ··········· 3
In this case, the alleged misrepresentation
was contained in the first note to the unaudited consolidated financial statements of WCC
for the three and six months ending September 30, 2007. That note provided in part as
follows:
―The Company was in violation of a financial
covenant in respect of its long term debt at
September 30, 2007 and a waiver has been
received from the Company‘s lenders. It is
expected, however, that this financial covenant will be violated in the 12 months following September 30, 2007, accordingly, this
debt has been classified as current in these
interim financial statements, with the result
that the Company has a working capital deficiency of $24,264,000 at September 30,
2007.
At current coal prices and Canadian/US dollar exchange rates, the Company does not
expect to have sufficient funds to meet its
long term debt obligations as they come due
and to continue the planned expansion of the
Perry Creek Mine, and accordingly the Company will require equity or debt financing
from its major shareholder and/or external
sources. These circumstances lend substantial
doubt as to the ability of the Company to
(Continued on page 2)
November 2012 | 1
Expert Accountant (continued)
(Continued from page 1)
meet its obligations as they come due and,
accordingly, the appropriateness of the use of
accounting principles applicable to a going
concern. The Company has been successful
in raising additional equity and debt financing in the past to fund its capital expenditures
and operations, and management believes
that these funds will be available in the future, however there is no assurance that any
required funding will be available to the
Company on acceptable terms. [Emphasis
added].‖
The Plaintiff retained an expert accountant,
Lawrence Rosen, who took issue with the
going concern note. He stated:
―An unavoidable threat to WCC‘s ability to
continue operations as a ‗going concern‘ in
late 2007 simply did not exist. Thus, in our
opinion, management‘s decision to mention
strong words, such as ‗going concern‘ was
not justified, as would have been prohibited
or at least be highly unusual under Canadian
GAAP as it existed at the time‖.
Rosen went further and said that management‘s efforts to obtain financing were ―slow
and half-hearted and fell short of expected
measures for a business that was supposed to
be in financial distress‖. He also said that ―far
too many events and activities by the management of WCC raised very serious concerns about the governance of WCC in 2007.
Minority shareholder oppression has to be
thoroughly investigated as one possibility‖.
Justice Strathy could not have been more
critical of Rosen‘s evidence. He found that
Rosen ―…engaged in blatant advocacy, making exaggerated, inflammatory and pejorative
comments and innuendos, which were argument rather than evidence‖. Justice Strathy
observed that Rosen had no expertise in corporate governance, securities law or corporate financing practices and said: ―The willingness of an expert to step outside his or her
area of proven expertise raises real questions
about his or her independence and impartiality. It suggests that the witness may not be
fully aware of, or faithful to, his or her responsibilities and necessarily causes the court
to question the reliability of the evidence that
is within the expert‘s knowledge.‖
The Court also found that Rosen had misstated the requirement of the Handbook of the
Canadian Institute of Chartered Accountants
with respect to going concern note disclosure,
which is not triggered by an ―unavoidable
threat‖ as Rosen opined but by ―material
uncertainties‖ related to ―events or conditions‖ that ―may cast significant doubt upon
the entity‘s ability to continue as a going
concern‖.
The evidence of the Defendants was that
there was a considerable back and forth between the senior financial officer of WCC
and PriceWaterhouseCooper‘s (―PwC‘s‖)
audit engagement leader as to whether or not
a going concern note was appropriate. WCC
did not want to use going concern terminology but PwC insisted upon it because WCC
was in violation of certain lending covenants
to Banque Nationale de Paris which required
that long-term debt be re-classified as a current liability and called into question the
ability of WCC to meet its liabilities as they
came due.
The Court also found that the Plaintiff‘s expert had concentrated on the language in the
going concern note but that it was necessary
to look at the financial statements as a whole,
including the Management Discussion and
Analysis. A fair reading of these documents
would disclose that although the company
faced significant challenges it had over $400
million in assets and had a reasonable prospect of obtaining new financing.
The Court said that ―…shareholders and
investors are entitled to the facts and they are
entitled to management‘s assessment of the
facts. Armed with this information, they are
able to make their own decisions. It would be
wrong for management to withhold bad news
to avoid upsetting shareholders. Doing so
would only serve to confuse and mislead
shareholders. The issue was confronted head
on by WCC and PwC and the decision was
made, correctly in my view, to give shareholders and the markets the facts and management‘s assessment of the facts to let them
make their own decision.‖
With respect to the conspiracy claim, the
Court found that the Audley financing had
not been secured by the time of the release of
the Q2 financial statements on November 14,
2007. The oppression claim was based entirely on provisions of the British Columbia
Securities Act. As this was a statutory remedy
which specified that the jurisdiction was with
the Courts of British Columbia, the Ontario
Superior Court of Justice declined to hear
that aspect of the claim. The motion for certification and the motion for leave to commence the misrepresentation claim under the
Securities Act were both dismissed.
Gould v. Western Coal Corporation, 2012
ONSC 5184 (CanLII)
Insured Controls Litigation Until Indemnified
In August of 2008 an explosion and fire
occurred at the Sunrise propane facility in
Toronto. People at the premises and in the
surrounding areas suffered personal injury
and/or property damage. In July of 2012 a
class action was certified on behalf of those
individuals. In Ontario, people who fall
within the description of the class are members of the class unless they chose to opt
out. In this case the deadline for opting out
of the class action was set at November 20,
2012.
In the meantime, Wawanesa Mutual Insurance Company (―Wawanesa‖) had paid
monies to a number of its insureds for loss-
es sustained as a result of the explosions at
the Sunrise facility. In August 2010 Wawanesa commenced a subrogated action to
recover amounts that it had paid to its
insureds (the ―Vilarino action‖).
On August 31, 2012 counsel for Wawanesa wrote to a number of Wawanesa‘s insureds and said: ―Wawanesa will be opting
you out of the [class] action so that it may
pursue its action, and yours, independently
of the class, as your uninsured claims will
be asserted as part of its subrogated action‖. One of the insureds who received
this letter was Ernesto Labora, who was
also a member of the class. Mr. Labora
lived two blocks from the site of the ex-
plosion. He is 64 years old, retired and
speaks English, but not fluently. Wawanesa
paid part of his claim but did not pay for
damage to his roof, driveway, front door or
for the contamination of his vegetable garden. He also claimed that he injured his hip
as he fled his home after the explosion and he
was not compensated for this injury.
Mr. Labora brought the letter from Wawanesa‘s counsel to the attention of class counsel.
Class counsel wrote to Wawanesa‘s counsel
asking for information with respect to all
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November 2012 | 2
Insured Controls Litigation (continued)
(Continued from page 2)
insureds to whom this communication had
been sent. Not receiving a response, he
brought a motion to restrain counsel for Wawanesa from communicating with class
members until the expiration of the opt-out
period and argued that Wawanesa was not
entitled to opt its insureds out of the class
action. Wawanesa argued that it did have that
right, pointing to the subrogation clause in
the policy which reads:
―We will be entitled to assume all ―your‖
rights of recovery against others and may
bring action in ―your‖ name to enforce these
rights when ―we‖ make payment or assume
liability under this policy. The amount recovered less the costs of recovery will be shared
between ―you‖ and ―us‖ in proportion to the
loss that each has borne. ―You‖ shall sign and
deliver all related papers and cooperate with
―us‖ in any reasonable manner to secure such
rights.‖
The Court disagreed, stating that it is a wellknown principle of insurance law that the
insured controls the litigation until he/she has
been fully indemnified. The Court quoted
from the case of Zurich Insurance Co. v. Ison
TH Auto Sales Inc. where the Court provided
a detailed review of the law and said:
―Fully indemnified‖ means not only indemnified for all losses covered by the policy, but
also indemnified for uninsured losses, such as
the insured‘s deductible, losses in excess of
the policy limits, and losses (such as business
losses) that are not covered by the policy.
This principle has been followed, in the case
of non-marine insurance, in numerous Canadian cases...at common law, it was wellsettled that until the insured was fully indemnified for all losses, the insurer had no rights
of subrogation.‖ The Court quoted from
MacGillivray on Insurance Law, where it is
stated:
―The assured is entitled to control any proceedings brought in his name until he has
received complete indemnity, that is to say, if
the insurer has not paid what is in fact a complete indemnity for all damage insured or
uninsured arising from the same cause of
action as the damage in respect of which
payment has been paid, the assured remains
dominus litis until he has recovered a complete indemnity and if he undertakes to prosecute his claim for the whole damage, the
insurers cannot interfere. The assured must
conduct the litigation with the proper regard
for the insurer‘s interest and will be liable in
damages for any misconduct for an abandonment of rights.‖
In this case, there was no evidence that the
insureds had been fully indemnified and consequently were entitled to control the litigation.
The Court also reviewed the Class Proceedings Act and the importance of the opt-out
process. There is a growing body of caselaw
dealing with the circumstances in which a
Court should intervene to restrict improper
communication between a defendant and a
class member and between third parties and a
class member. The Court found that this was
a case in which it was appropriate to intervene.
The Court also found that the counsel for
Wawanesa had violated the Rules of Professional Conduct by communicating directly
with a class member in circumstances where
there was an existing solicitor/client relationship between the class member and class
counsel.
Durling v. Sunrise Propane Energy Group
Inc., 2012 ONSC 6328 (CanLII)
Fire as an Incidental Peril
The Ontario Superior Court of Justice Ontario concludes that the one-year limitation period contained in the Statutory Conditions
applicable to a fire insurance policy don’t apply in the case of a multi-peril policy.
Marilyn Boyce and her husband Thomas run
a women‘s fashion boutique in the Village of
Merrickville, Ontario. When Mrs. Boyce
arrived to open the store for business on Saturday October 30, 2010 she detected a foul
smell. She reported the matter to the police,
who concluded that the smell was the result
of vandalism on the eve of Halloween. She
reported the matter to her insurer, Cooperators General Insurance (Co-Operators).
Co-Operators took the position that the smell
was caused by a skunk and that there was no
coverage under its policy. The Plaintiffs then
retained a pest control company who investigated and found no evidence of pest activity.
This report was forwarded to Co-Operators.
Co-Operators responded by writing to Marilyn Boyce on November 11, 2010 reiterating
that the damage was caused by a peril not
covered under the policy but also stating that
any legal proceeding against Co-Operators
would be ―absolutely barred‖ because it had
not been commenced within one year of the
loss or damage.
Marilyn and Thomas Boyce sued Co-
Operators and Co-Operators moved to have
their claim dismissed on the basis that it was
time barred. In the alternative, Co-Operator‘s
sought to have the claim by Thomas Boyce
dismissed on the basis that he was not an
insured under the policy.
Ontario‘s Limitations Act, 2002 provides that
the basic limitation period is 2 years. CoOperators argued that the 2 year limitation
period did not apply for two reasons. Firstly,
they argued that there are statutory conditions
in the Ontario Insurance Act which impose a
1 year limitation period and that that limitation period should prevail over the general
limitation period in the Limitations Act, 2002.
Secondly, they argued that the limitation
period had been varied by a clause in the
policy, under the heading, Statutory Conditions, which read:
―Every action or proceeding against the insurer for the recovery of any claim under or
by virtue of this contract is absolutely barred
unless commenced within one year next after
the loss or damage occurs‖.
The Plaintiffs argued that the statutory conditions in the Insurance Act related only to fire
insurance. Section 143(1) of the Insurance
Act states that ―This Part applies to insurance
against the loss of or damage to property
arising from the peril of fire in any contract
made in Ontario except, … (c) where the
peril of fire is an incidental peril to the coverage provided‖.
The Supreme Court of Canada considered a
similar clause in the British Columbia case of
KP Pacific Holdings Ltd. v. Guardian Insurance Company of Canada and concluded that
fire is an ―incidental peril‖ when contained in
a multi-peril policy. The Supreme Court considered Section 119 of the British Columbia
Insurance Act, which was substantially identical to Section 143(1) of the Ontario Insurance Act and said:
―If we still lived in a world where people
took out different policies for each of these
(Continued on page 4)
November 2012 | 3
Fire as an Incidental Peril (continued)
(Continued from page 3)
risks, s. 119 would still function reasonably
well. The problem is that our world is quite
different. Section 119 is being asked to apply
to an animal it was never designed to tame –
the modern multi-peril policy. Section 119 is
built on the premise of discrete policies for
discrete subject matters, with limited overlap.
It deals with overlap and intersection by enumerated exclusions, and by the logic of what
is primary and what is incidental. It may still
make good sense for certain multiple subjectmatter policies, where these are fairly limited
in scope, and where the subject matters can
be readily identified and ranked. But when
applied to broader multi-risk policies, it
fails….
…I conclude that s. 119 can be applied to
comprehensive policies only at the costs of
contrived reinterpretation and anomalous
consequences. Whatever interpretation one
seeks to put on Part 5‘s terms, however one
struggles to apply it to this policy, one ends
by acknowledging inconsistency. I cannot
conclude either from the language of s. 119
or its history that the Legislature intended a
multi-risk policy such as this one to fall within Part 5 with all the attendant consequences,
including a shortened limitation period. It
follows that this policy, like any other policy
that does not fit into a specific category, is
governed by Part 2, the section of general
application.‖
The Court in this case concluded that it fell
squarely within the ambit of KP Pacific
Holdings and that a multi-peril policy, such
as the one issued to the Plaintiffs, cannot be
considered fire insurance. The peril of fire is
an ―incidental peril‖ to the coverage provided
and therefore excluded from the application
of Part IV (Fire Insurance) of the Insurance
Act by virtue of s. 143(1)(c).
The Limitations Act, 2002 allows for a limitation to be varied in the case of a ―business
agreement‖. Co-Operators argued that the
policy was a business agreement and that
section 14 of the ―Statutory Conditions‖ set
out in the policy constituted a contractual
agreement to vary the limitation period. The
Court disagreed and quoted the case of Bell
Canada v. Plan Group Inc., a decision of the
Ontario Superior Court of Justice which established that in order for there to be an
agreement under section 22 of the Limitations Act, 2002 it must include the following:
―1. specific reference to the statutory limitation period;
2. clear and unequivocal language that the
parties are intending to vary the application
of the statutory protection contained in the
applicable limitation period; and
3. provisions which clearly alert the prospective claimant that they are foregoing a statutory right to a longer limitation period within
which to make a claim.‖
The Court concluded that the language con-
tained in section 14 of the policy contained
no such language: ―…to the contrary, the
language misleadingly suggests that the limitation period contained in the ‗Statutory Conditions‘ were mandated by legislation, not by
contract‖.
The Court went on to conclude that in any
event the insurance contract could not be
considered a ―business agreement‖ within the
meaning of the Limitations Act, 2002:
―In my view, insurance contracts are not
‗business agreements‘ as contemplated by the
Limitations Act, 2002. Insurance contracts are
‗piece of mind‘ contracts which are sold by
the insurance industry to members of the
public. They are branded with the hallmark
mutual good faith obligations which are not
included in ‗business agreements‘. In my
view the legislature did not intend to include
such agreements as ‗business agreements‘‖.
The Court also concluded that Co-operators
had produced no evidence to support its contention that Thomas Boyce was not a party to
the insurance contract. The evidence was that
all negotiations leading up to the conclusion
of the contract were carried on by Thomas
Boyce.
The motion for summary judgment was dismissed.
Boyce v. Co-Operator’s General Insurance,
2012 ONSC 6381 (CanLII)
V.R.P. (Sas) Bersenas
(416) 982-3802
[email protected]
Janice E. Blackburn
(416) 982-3806
[email protected]
Tae Mee Park
(416) 982-3813
[email protected]
Peter M. Jacobsen
(416) 982-3803
[email protected]
James R. Lane
(416) 982-3807
[email protected]
Ioana Bala
(416) 982-3810
[email protected]
Gerard A. Chouest
(416) 982-3804
[email protected]
Carlos Martins
(416) 982-3808
[email protected]
Christopher C. Dearden
(416) 982-3812
[email protected]
James P. Thomson
(416) 982-3805
[email protected]
Adrienne Lee
(416) 982-3809
[email protected]
Andrew MacDonald
(416) 982-3830
[email protected]
33 Yonge Street Suite 201,
Toronto, Ontario, CANADA
Phone: 416 982-3800
Fax: 416 982-3801
Our firm specializes in Insurance, Professional Liability & Indemnity, Media & Defamation, Health &
Administrative Law, Transportation and Dispute Resolution. These Litigation Notes focus on decisions, actions
and events of interest to our clients.
These Litigation Notes are intended to provide general information and do not constitute legal advice. Readers
should consult legal counsel on matters of interest or concern raised by anything in this publication.
We welcome your comments and suggestions.
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