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 (Continued on page 3) 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. November 2012 | 4