The bankruptcy trustee of Peoples Department Stores sued the Wise brothers over a joint inventory purchasing arrangement adopted while they directed Peoples and its parent company. The trustee alleged that the arrangement unfairly favoured the parent and harmed the subsidiary's creditors.
The Supreme Court dismissed the trustee's appeal. It distinguished the statutory fiduciary obligation, which is owed to the corporation, from the duty of care under section 122(1)(b) of the Canada Business Corporations Act. The Court said that creditors may be among the stakeholders whose interests are considered as a corporation's circumstances change. That doesn't create a separate general fiduciary duty to those creditors.
The Court also held that the Wise brothers had not breached the statutory duty of care in adopting the arrangement on the evidence before it. This is a judgment on the particular allegations and records, rather than blanket permission for directors to disregard creditors whenever a corporation is in financial difficulty.
For governance, the case shows why a decision record must explain the corporation's interests, the information considered and the board's process. Directors should not simply invoke their duties as a slogan when the business is facing financial trouble.