Jan 31st, 2022
Nov 5th, 2018
By Laurent Debrun
You may have a duty to inform third parties of the difficult financial situation of a debtor.
A director of a corporation acting reasonably to try to put financial order in the house may not have a duty to disclose the state of the company’ finances nor even that it is in the vicinity of insolvency. Equally, a party to litigation should not, as a general rule, be considered as obliged to inform the other party of the state of its patrimony, even if precarious. The same does not apply to a director who induces a third-party to contract with an insolvent company knowing that the latter would be unable to honor its obligations. Here is an illustration from a recent judgment of the Court of Appeal.
Halperin wrote a book on Guy Laliberté for which Transit was to pay him royalties. Brouillette was a lawyer deeply involved in the affairs of Transit but also advising Halperin. He had taken part in the contract between Halperin and Transit for the book. When Transit failed to pay Halperin the royalties, Halperin launched arbitration proceedings and obtained an award against Transit. Halperin could not execute on the award as Transit lacked sufficient assets. The Court of Appeal found that the lawyer had a duty to inform his client of the precarious state of Transit‘s finances and of the fact that he had obtained first ranking security over Transit’s assets for a debt due to him and to his firm so that any award Halperin could obtain in the arbitration would be of no value. The lawyer had a duty to inform his client that any effort by him to collect the monies might be fruitless and the cost of doing so wasteful.
The duty to inform arises as soon as information is relevant to a decision to be taken, is known to the debtor of the obligation and the creditor of the obligation is unaware nor in a position to obtain the information on his own or enjoys a level of confidence in the debtor so that it is reasonable to expect disclosure. The creditor remains under an obligation to work prudently and with diligence. He is supposed to inform himself of important matters. The duty to inform another person can exist independently of any contractual obligation.
Because of his knowledge as a director, shareholder and counsel for Transit, had the lawyer informed his client that arbitration proceedings were a waste of time and money, he would not have incurred the related cost. Damages were awarded to Halperin, namely his cost to pursue the arbitration and moral damages for the resulting anxiety.
 Halperin v Brouillette, 2018 QCCA 1758,
This publication is of a general nature, is as of the date indicated and is not intended to constitute an opinion or legal advice. The facts and circumstances of your particular situation should be specifically identified and addressed before appropriate legal advice may be given.