Funding defence costs for corporate officers and directors

Cytrynbaum v. Look Communications Inc., 2013 ONCA 455 deals with ongoing funding for litigation defence by former corporate directors and officers for a claim brought by their corporation.  Such funding is usually granted pursuant to indemnity agreements. The Court held, however, where there is a strong prima facie case of bad faith such funding can be withheld:

[54]       It is widely accepted that this type of preliminary merits-based assessment is distinct from a final determination of the dispute. When preliminary or interlocutory orders require some assessment of the merits (including, for example, motions for interlocutory injunctions, motions for leave to proceed after the expiry of procedural time periods or motions for a stay pending appeal), the court is cautioned against attempting to make anything approaching a final determination of the issue. The court typically looks to see if the case is "arguable", "raises a serious issue to be tried" or is "not frivolous and vexatious". If a preliminary or interlocutory order will have drastic consequences (including, for example, an interlocutory mandatory injunction or a Mareva or Anton Piller order), the bar is raised to the level of "strong prima facie case".

[55]       Third, I do not agree that the strong prima facie test eviscerates the right to advance funding. In my view, the application judge was correct in finding that s. 124(4) requires some assessment of the merits of the corporation's allegations of bad faith as a condition for advance funding. He correctly acknowledged that the appellants were entitled to the presumption of good faith as officers and directors, but also that the corporation could lead evidence to rebut that presumption. He recognized that the issues of indemnity and advance funding required a balance to be struck between providing adequate protections and incentives to attract strong candidates who foster entrepreneurialism and to encourage responsible behaviour.

[56]       In my view, the strong prima facie case test strikes an appropriate balance between those competing considerations. It is a stringent test that gives significant weight to the protection of officers and directors. It ensures that they will ordinarily receive advance funding but leaves open the possibility that advancement will be denied when there is strong evidence of bad faith.