Vol. 145, No. 10 — May 11, 2011

Registration

SOR/2011-108 April 20, 2011

FINANCIAL ADMINISTRATION ACT

ARCHIVED — Indemnification and Advances Regulations for Directors and Officers of Crown Corporations

T.B. 836119 April 20, 2011

The Treasury Board, pursuant to subsection 119(3) (see footnote a) of the Financial Administration Act (see footnote b), hereby makes the annexed Indemnification and Advances Regulations for Directors and Officers of Crown Corporations.

INDEMNIFICATION AND ADVANCES REGULATIONS FOR DIRECTORS AND OFFICERS OF CROWN CORPORATIONS

INTERPRETATION

Definitions

1. (1) In these Regulations, “Act” means the Financial Administration Act.

Definitions

(2) The following definitions apply for the purposes of section 119 of the Act,

“action or proceeding”
« enquête ou procédure »

“action or proceeding” does not include an internal investigation or internal proceeding, including a grievance, staffing, or disciplinary procedure, unless it is likely to have serious financial or other personal consequences for the director or officer.

“officer”
« dirigeant »

“officer” means the president, vice-president, secretary, treasurer, comptroller, general counsel, general manager or managing director of a Crown corporation or any other individual appointed as an officer of a Crown corporation who performs functions similar to those normally performed by an individual holding any of those offices or any other individual appointed as an officer of a Crown corporation by or under an Act of Parliament.

“party”
« partie »

“party” includes an officer or director who participates in, or who reasonably expects to participate in, an action or proceeding as a witness or intervenor or in any other capacity.

REQUEST

Request

2. (1) A request for an indemnification or advance under section 119 of the Act shall be made in writing to the Secretary of the Treasury Board as soon as feasible after the director or officer becomes a party to an action or proceeding or incurs a cost, charge or expense.

Content

(2) The request shall

  1. (a) specify the capacity and period in which the director or officer has served the Crown corporation;
  2. (b) include a description of the nature of the action or proceeding;
  3. (c) specify the amount requested and the amount that has already been approved in respect of the action or proceeding;
  4. (d) include a copy of any court documents or other documents exchanged by the parties in relation to the action or proceeding that contain a statement of the material facts relied upon and the relief claimed;
  5. (e) specify the name of the legal counsel retained or to be retained;
  6. (f) provide a detailed accounting of the costs, charges and expenses that have been incurred in respect of the action or proceeding including any amount paid to settle the action or proceeding or satisfy a judgment and an estimate of any such costs, charges or expenses expected to be incurred in respect of the action or proceeding;
  7. (g) include a copy of any invoices and other supporting documents that reflect the amounts paid or payable in respect of the action or proceeding;
  8. (h) any information that may be used to rebut a presumption referred to in section 3; and
  9. (i) in the case of a request related to an internal investigation or internal proceeding, any information that demonstrates that the investigation or proceeding is likely to have or has had serious financial or other personal consequences for the director or officer.

Additional information

(3) The individual making the request shall, on the request of the Secretary of the Treasury Board, provide any other information required to assess whether the individual is entitled to an indemnification or advance and the amount of the indemnification or advance.

PRESUMPTION

Presumption

3. A director or officer is presumed not to have fulfilled the condition set out in paragraph 119(1)(a) of the Act if

  1. (a) the director or officer initiates the action or proceeding, unless it forms part of a legitimate defence to an action or proceeding in respect of which an indemnification or advance is paid to the director or officer under section 119 of the Act; or
  2. (b) the Crown corporation served by the director or officer commenced the action or proceeding against the director or officer.

DECISION

Requests no more than $100,000

4. (1) The Secretary of the Treasury Board shall make a decision in relation to a request if the sum of the amount requested and any other amounts already approved in respect of the same action or proceeding is no more than $100,000.

Notice

(2) Notification of the decision shall be made in writing within 30 days of receipt of the request.

Requests more than $100,000 and no more than $250,000

5. (1) The President of the Treasury Board shall make a decision in relation to a request if the sum of the amount requested and any other amounts already approved in respect of the same action or proceeding exceeds $100,000 but is no more than $250,000.

Notice

(2) Notification of the decision shall be made in writing within 30 days of receipt of the request.

Requests more than $250,000

6. (1) The Treasury Board shall make a decision in relation to a request if the sum of the amount requested and any other amounts already approved in respect of the same action or proceeding is more than $250,000.

Notice

(2) Notification of the decision shall be made in writing within 90 days of receipt of the request.

Reasons

7. If the request is rejected in whole or in part, the notice shall include the reasons for that decision.

Expenses, costs or charges to be approved

8. In determining whether costs, charges or expenses are reasonably incurred, the Secretary or President of the Treasury Board, or the Treasury Board, as the case may be, shall take into consideration, among other things,

  1. (a) whether it is or was necessary to retain legal counsel before the commencement of an action or proceeding;
  2. (b) the skill, experience and specialized knowledge of the legal counsel;
  3. (c) the complexity and novelty of the matter;
  4. (d) the amount of money or value of any property that is involved;
  5. (e) the time expended or to be expended by the legal counsel;
  6. (f) the number of documents prepared; and
  7. (g) the place where, and the circumstances under which, the services are rendered.

Non-permitted basis for refusal

9. A request for an indemnification or an advance shall not be refused based solely on the fact that

  1. (a) the director or officer, as the case may be, acted negligently; or
  2. (b) the director or officer has agreed to a settlement of the action or proceeding.

CONDITIONS

Obligations

10. Any approval of an indemnification or an advance under section 4, 5 or 6 is conditional on the individual

  1. (a) providing a written undertaking to the Secretary of the Treasury Board in the form required by the Treasury Board to reimburse any amounts to which they are not entitled;
  2. (b) providing a written authorization to pay to Her Majesty any amounts that the director or officer is to receive or is awarded as costs, charges and expenses;
  3. (c) notifying the Secretary of the Treasury Board in writing of any substantial changes to the information that is required under subsection 2(2) including the details of any settlement of the action or proceeding;
  4. (d) providing, on the request of the Secretary or President of the Treasury Board, or the Treasury Board, as the case may be, information with respect to the progress of the action or proceeding, any changes in scope of liability or any other matter relevant to the indemnification or advance that has been approved;
  5. (e) if the approval is given prior to the conclusion of the action or proceeding, submitting to the Secretary of the Treasury Board, on a monthly basis, any invoice and any other supporting documents that reflect the costs incurred; and
  6. (f) providing to the Secretary of the Treasury Board at the conclusion of the action or proceeding a final accounting of any amounts advanced and reimbursing any amounts that are not expended.

OBLIGATION TO REPAY

Repayment

11. Any amounts indemnified or advanced shall be repaid

  1. (a) if the conditions set out in section 10 are not met;
  2. (b) if the amounts are approved as a result of a misrepresentation or the concealment of a material fact; or
  3. (c) if the amounts are paid as the result of an administrative error.

COMING INTO FORCE

Registration

12. These Regulations come into force on the day on which they are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issue and objectives

The government needs to attract qualified, capable Crown corporation directors and officers who are able to make decisions in the best interests of their corporations, without the threat of incurring personal liability expenses for their actions. Thus, section 119 of the Financial Administration Act (FAA) requires the Treasury Board to indemnify directors and officers of Crown corporations in most circumstances when they become party to legal actions or proceedings by reason of their role with the corporation. Private sector corporations offer similar protection to their directors and officers through the purchase of insurance policies.

Approximately 1 200 directors and officers of Crown corporations are entitled to request protection under section 119 of the FAA. The Indemnification and Advances Regulations for Directors and Officers of Crown Corporations establish the terms, conditions and process by which directors and officers may request indemnification and advances of their legal costs, charges and expenses.

In the absence of such regulations, some directors and officers have been reluctant to rely on section 119 of the FAA for protection. Consequently, some Crown corporations have been purchasing private director and officer liability insurance. Surveys of Crown corporations in 2008 and 2010 found that director and officer liability insurance premiums range from about $7,000 to $140,000 annually. The surveys did not reveal any claims ever having been made under such policies.

The objectives of these Regulations are therefore to

  • provide greater clarity with respect to the scope and application of section 119 of the FAA. It is anticipated that the Regulations will reassure Crown corporation directors and officers of the effectiveness of section 119 of the FAA to protect them from personal liability for legal costs, charges and expenses they might incur in connection with their roles in Crown corporations;
  • ensure consistency in the application process and the manner in which indemnification and advances will be provided to the directors and officers of Crown corporations; and
  • promote a more efficient use of public funds by encouraging Crown corporations to eliminate or reduce their purchases of private director and officer liability insurance.

Description and rationale

Subsection 119(3) of the FAA authorizes the Treasury Board to make regulations regarding indemnification and advances for directors or officers of Crown corporations, including the associated terms and conditions.

These Regulations

  • clarify the scope of the protections offered by section 119 of the FAA by defining key terms, and specifying the circumstances in which a director or officer will not necessarily be entitled to be indemnified (e.g. where claims against the director or officer are commenced by their own Crown corporation);
  • establish an accessible and transparent process to be followed when a director or officer requests indemnification or an advance of legal costs, charges and expenses;
  • delineate the authority of the Treasury Board, the President of the Treasury Board or the Secretary of the Treasury Board to approve these requests; and
  • set the standard conditions that apply whenever funds are advanced (e.g. the requirement for the director or officer to provide updated information and to undertake to repay funds if the director or officer is ultimately not entitled to be indemnified).

The indemnification protections provided under the FAA, as clarified by the Regulations, are generally comparable to those provided to public servants under the Policy on Legal Assistance and Indemnification (the “Policy”). In the private sector, the Canada Business Corporations Act permits corporations to extend similar protections to their officers and directors. The Regulations’ clarification of the indemnification provisions will help Crown corporations to continue to attract and retain experienced, well-qualified public and private sector individuals to serve as officers and directors.

Under section 119 of the FAA, the government is already responsible for the costs of indemnifying directors or officers. By establishing a clear process for requesting indemnification and authorizing advances, the Regulations are likely to reduce the administrative costs and the time required to approve requests. This will encourage some Crown corporations to reduce or eliminate the purchase of private sector director and officer liability insurance, providing potential financial savings to the government.

However, it is recognized that other Crown corporations may continue to purchase private insurance policies. The government will examine each indemnification case separately, and sufficiently resourced Crown corporations may ultimately be called upon to absorb the amounts paid out of the Consolidated Revenue Fund to indemnify their officers and directors.

Consultation

Crown corporations were consulted on the Regulations’ content through meetings in May 2009 and February 2010. Both meetings were well attended. Crown corporation representatives expressed strong support for developing the Regulations and made a variety of comments and suggestions regarding their content, many of which have been incorporated into the Regulations. At the February 2010 meeting, participants reviewed an initial draft of the Regulations. The final draft of the Regulations was circulated to all Crown corporations in August 2010 for review and comment.

Key issues addressed

  • The Policy directs public servants to Department of Justice representation, unless there are valid reasons to have private counsel. However, Department of Justice does not provide legal services to most Crown corporations. The Regulations contemplate that officers and directors may retain private counsel when necessary.
  • The defined timelines in the Regulations for approval of requests for indemnification or advances are as tight as possible to ensure that the Treasury Board (or its delegate) makes timely decisions.
  • The Regulations exclude internal investigations from indemnification coverage, consistent with the Policy and most private sector director and officer liability insurance policies.
  • The scope of the liability protection provided under section 119 of the FAA does not encompass other fiduciary roles taken on by directors and officers (e.g. their possible role as trustee of the company pension plan), which is consistent with the Policy and private director and officer liability insurance policies.

Implementation, enforcement and service standards

Requests for indemnification under section 119 of the FAA are submitted voluntarily by directors and officers wishing to be indemnified or to obtain an advance of legal costs, charges and expenses. Therefore, no enforcement mechanism is needed.

With respect to service standards, procedures will be put in place to ensure that government responses to requests for indemnification or advances are met within the timeframes set out in the Regulations (within 30 days of receipt of the request for total amounts up to $250,000 and 90 days for amounts greater $250,000). Procedures will also be put in place to effectively monitor the payments made as a result of any such requests. Further, a guidance document will be created to assist directors and officers who may wish to submit a request to the Treasury Board Secretariat for indemnification or an advance of funds.

Contact

Heather Smith
Executive Director
Governance Directorate
Treasury Board Secretariat
Telephone: 613-957-0138
Email: gd-dg@tbs-sct.gc.ca

Footnote a
S.C. 2009, c. 2, s. 373(4)

Footnote b
R.S., c. F-11