Theatre mogul Garth Drabinsky is shown in Toronto on March 25, 2009. Drabinsky has lost an appeal through which he sought to reclaim his Order of Canada, an honour he was stripped of while serving a prison term for fraud.CHRIS YOUNG/The Canadian Press
The Supreme Court of Canada will hear an appeal of a landmark 2014 court ruling that ordered accounting firm Deloitte & Touche to pay $118-million in damages for negligence in its work as auditor of failed live-theatre company Livent Inc., further extending the long-running Livent saga.
Canada's top court said Thursday it has accepted Deloitte's request to hear an appeal of an Ontario Court of Appeal decision released in January. That decision upheld a lower court ruling imposing a $118-million monetary penalty against the accounting firm.
The Supreme Court has not set a date yet for the appeal hearing, but the decision means further delays for creditors who have already faced a long wait to see their case resolved before the courts. Livent collapsed in 1998 amid allegations of accounting improprieties, and company founders Garth Drabinsky and Myron Gottlieb were sentenced to jail terms in 2009. Both have since been released.
Livent bondholder Richard Ross, who headed the creditor group in the legal action, said Thursday he was shocked to learn the case will face further appeal after years of litigation.
"By the time this is over it will be 20 years since the Livent collapse. This just isn't justice," he said.
The case has become important in the legal community because it has historically been extremely difficult for investors to sue auditors when companies collapse amid allegations of accounting fraud. The 2014 ruling in the Livent case was seen as opening a new route to allow claims to proceed against auditors in other cases.
Ontario Superior Court Justice Arthur Gans ruled in 2014 that Deloitte & Touche breached its "duty of care" to investors. He said the audit team "seemed to turn a blind eye to warning signs" about a controversial 1997 transaction at Livent, and said he was "at a loss" to understand how Deloitte provided a clean audit opinion for 1997.
Justice Gans' decision was upheld by Ontario's appeal court in a decision released in January. Ontario Court of Appeal Justice Robert Blair said "the record amply supports the trial judge's findings that Deloitte was negligent in the conduct of the 1997 audit." His decision, however, challenged a long-standing decision by the Supreme Court in a 1997 case involving Hercules Management Ltd., which set out very narrow parameters for lawsuits against auditors to succeed, essentially shutting down most litigation for years.
The Supreme Court's decision to hear the Livent appeal means it will take a fresh look at key issues in auditor lawsuits and review the position it set out in the Hercules matter. One of the key legal issues before the Supreme Court will be who can sue an auditor.
The Hercules decision concluded auditors owe a duty of care to the corporation that hires them – and not to shareholders or creditors directly. To adhere to the Hercules ruling, the lawsuit against Deloitte was technically filed by Livent itself through its special receiver, even though the creditor group led and financed the litigation and will receive much of the award.
Deloitte is challenging that move, arguing the lawsuit was essentially filed by creditors in reality and not the corporation, and therefore breaches the provisions of the Hercules decision. While the Ontario Court of Appeal rejected the argument, the Supreme Court will be asked to reconsider the issue. The court will also reconsider Deloitte's argument that the company had no right to sue because the fraud was conducted by Livent's own senior executives, which it argued meant the company essentially conducted the fraud and should not be allowed to also sue over its own conduct.
Justice Blair of the Ontario Court of Appeal said allowing the argument would effectively mean auditors could never be sued for negligence in cases of accounting fraud, which are by their nature conducted by managers at the company. He said such a position would "risk undermining the public audit system" and leave innocent participants with no remedy for auditor negligence.
Janet McFarland