Directors’ liability: What role does good faith play in the conclusion of a purchase agreement?
On January 9, 2024, the Quebec Court of Appeal had the opportunity to render a decision regarding the quantification of damages incurred following the conclusion of a share purchase agreement between Pop-Up and Boomba1. The appellate court had to decide whether the Superior Court had erred in awarding $41,000 in damages to the appellant, Donato Terrigno, instead of the $115,000 he claimed from Boomba and Benoit Brière, the sole shareholder and director of Boomba. In this publication, we will present a brief summary of the complex facts of this litigation, followed by the legal conclusions regarding the liability of the director, issued by each of the courts.
Summary of Facts
In the summer of 2018, Boomba, whose sole shareholder is Benoit Brière, acquired all the shares of Pop-Up from Donato Terrigno. Pop-Up’s objective at that time was to operate industrial containers, particularly for large-scale events. Consequently, Mr. Brière became the sole director and therefore the manager of Pop-Up.
Contained within the purchase agreement was a clause whereby Boomba committed to use its best efforts to release Mr. Terrigno from the guarantee of a loan made by a bank with regard to Pop-Up. However, the month following the transaction, Pop-Up, under the direction of Mr. Brière, completely ceased repayment of the loan in question, and made no attempt to release Mr. Terrigno from his guarantee. Under these circumstances, and with Pop-Up now insolvent, Mr. Terrigno was forced to come to an agreement with the bank and pay them $115,000 to repay the loan established between the bank and Pop-Up.
As a result, Donato Terrigno sought damages from Boomba and Benoit Brière, alleging that they allowed Pop-Up to deteriorate and took no action to release Mr. Terrigno from his guarantee, thereby violating the purchase agreement and the requirements of good faith under the Civil Code of Québec. For his part, Mr. Brière claims that at the time Boomba acquired the shares of Pop-Up, he was unaware of the true financial situation of the company, preventing him from consenting to the purchase agreement in an informed manner. Finally, he adds that it was Pop-Up, through the agreement, that undertook to make efforts to release Mr. Terrigno from his guarantee, not himself, Benoit Brière, as a mere shareholder of Boomba.
Analysis of the Superior Court
Faced with a state of affairs even more complex than suggested by the summary presented above, it was the duty of the Superior Court of Québec to render a decision regarding the allegations of each party2. The main issues in dispute are stated as follows:
[54] […] Did Boomba and Brière commit a fault towards Terrigno that obliges them to indemnify him […]?
[55] As for Brière, does there exist a legal link engaging extracontractual liability as the sole director of Pop-Up or Boomba or otherwise?3 [Our translation]
Faced with the evidence, the court considered that Boomba and Mr. Brière had committed faults towards Mr. Terrigno, as well as acted in bad faith, contrary to the requirements of Quebec law4. Indeed, Benoit Brière had all the necessary information to conduct a diligent and thorough due diligence before deciding to acquire the shares of Pop-Up. Moreover, the facts clearly show that he never intended to continue the operation of this company, and omitted to take any action to release Mr. Terrigno from his guarantee. “[329] If Terrigno had known Brière’s true intentions once the shares and control of Pop-Up were acquired, he would likely never have adhered to and accepted to sign the purchase agreement.”5 [Our translation] Through his fraudulent maneuvers, Benoit Brière thus incurred his extracontractual liability as a director6.
Regarding the quantification of damages, although holding Boomba and Mr. Brière responsible for the damages caused to Mr. Terrigno, the Court condemned them to pay the sum of $41,000, rather than the $115,000 requested. To arrive at this amount, the Court based itself on the sale price of the containers, established by Brière a few years earlier, for the sum of $41,000. In the absence of any other tangible factual element, the Court considered that if Mr. Terrigno had not sold his shares in 2018, he could have, as director, disposed of these containers, the only assets of Pop-Up, to recover their market value. Pop-Up could thus have repaid the $41,000 to the bank, an amount he would not have had to pay as a guarantee.
In disagreement with this quantification of damages, which he deemed far too low, Donato Terrigno appealed to the Court of Appeal.
Analysis of the Court of Appeal
Before the Court of Appeal, Terrigno “argues that the trial judge erred in not taking into account the value of the assets indicated in the ‘in-house’ financial statements of Pop-Up […], which attribute to them a greatly superior value”7 [Our translation]. The judges of this instance reject his request, considering that financial statements that have not been verified by an external accountant do not have strong probative value before a court, in the absence of substantial evidence to corroborate them. However, Mr. Terrigno does not provide such evidence. Moreover, the financial statements of 2018 only mentioned the value of the assets recorded in the company’s books, and not their market or liquidation value, which would have allowed a more accurate approximation of the value of the assets held in 2018.
Consequently, and without ruling again on the liability of Boomba and Mr. Brière, which remains unchanged, the Court dismisses Mr. Terrigno’s appeal, thereby maintaining the amount of his compensation established at $41,000.
Written in collaboration with Laury-Ann Bernier, LL.M.
1 Terrigno c. Boomba Holdings Inc., 2024 QCCA 14.
2 Banque de développement du Canada c. Terrigno, 2022 QCCS 2878.
3 Id., par. 54-55.
4 Civil Code of Québec (hereinafter “C.CQ.“), art. 6, 7 et 1375.
5 Banque de développement du Canada c. Terrigno, préc., note 2, par. 329.
6 C.C.Q., art. 1457.
7 Terrigno c. Boomba Holdings Inc, préc., note 1, par. 7.