A shareholder who has been squeezed out, excluded from management, denied information, or otherwise mistreated by the majority can apply for relief under the oppression remedy. But what happens when that shareholder is not entirely innocent themselves? What if they misappropriated corporate funds, provoked the breakdown in the relationship, or otherwise behaved badly before coming to court? Can their own conduct be used against them?
The answer lies in the clean hands doctrine, one of the oldest principles in equity and one of the most frequently raised defences in shareholder disputes. Understanding how it works in the context of oppression remedies is important for both complainants assessing the strength of their claim and respondents looking for ways to limit or defeat it.
What Is the Clean Hands Doctrine?
The clean hands doctrine derives from one of equity’s oldest maxims: “he who comes into equity must come with clean hands.” The principle is that a party who seeks equitable relief from a court cannot be guilty of illegal or inequitable conduct in relation to the same underlying dispute. If you have behaved badly in connection with the very matter on which you are asking the court to help you, the court may decline to do so.
The rationale is straightforward. Equitable remedies are discretionary. A court exercising equitable discretion can fashion relief to suit the particular circumstances of the case, but it is equally within that discretion to withhold relief where the party seeking it has not come to court with the moral standing to ask for it. Awarding an equitable remedy to a party who has themselves acted inequitably in connection with the dispute would be an abuse of the court’s equitable discretion.
Because the oppression remedy, although created by statute, is generally regarded as equitable in nature, the clean hands doctrine is potentially applicable in oppression proceedings. Courts have broad discretion in fashioning remedies under the oppression provisions of statutes such as the Canada Business Corporations Act (CBCA) and Ontario’s Business Corporations Act (OBCA), and that discretion is, in principle, the same kind of discretion that equity courts have always exercised. The leading cases on the clean hands doctrine in the oppression context have emerged from courts across Canada and the United Kingdom, but Ontario courts apply the same principles under both the CBCA and the OBCA.
How Courts Actually Apply It in Oppression Cases
Despite the theoretical applicability of the clean hands doctrine to oppression proceedings, courts have been consistently reluctant to use it to bar relief entirely. The leading statement of principle comes from Journet v. Superchef Food Industries Ltd., where Justice Gomery rejected the argument that an oppression complainant must establish their own “perfect probity” as a precondition to relief. The courts have repeatedly affirmed that position.
The reason for this reluctance is practical as well as principled. In many shareholder disputes, particularly in closely-held corporations, neither party comes to court with perfectly clean hands. If the doctrine were applied strictly and symmetrically, it could deprive deserving complainants of relief simply because the relationship had become mutually hostile and both parties had behaved badly at various points. That result would undermine the oppression remedy’s fundamental purpose, which is to protect those whose reasonable expectations as shareholders have been defeated.
More fundamentally, the textbooks and cases make clear that there is no independent or overriding requirement that an oppression complainant must come to court with clean hands. The doctrine does not create independent rights in the respondent that do not otherwise exist. It can potentially deny relief to a complainant who has behaved improperly, but it cannot be used to bootstrap a case for the respondent that would otherwise not exist.
When the Doctrine Can Actually Apply
The clean hands doctrine is not irrelevant in oppression proceedings. It simply does not apply automatically or broadly. For it to operate as a bar to relief or a reason to reduce the remedy, specific conditions must be met.
The clearest statement of these conditions is that there must be an immediate and necessary relationship between the complainant’s misconduct and the relief being sought. It is not enough that the complainant has behaved badly in some general sense. The misconduct must be directly connected to the specific relief the complainant is asking the court to grant. As stated in the case law, the person seeking equitable relief must effectively be required to rely on their own misconduct to vindicate their claim before the doctrine will be engaged.
This is a demanding standard. General dishonesty or bad character, divorced from the particular transaction or conduct that forms the basis of the oppression claim, will not engage the doctrine. General fraudulent conduct signifies nothing for clean hands purposes unless it can be connected directly to the particular matter in respect of which relief is sought.
The doctrine has been found to apply in the following specific situations:
Where the complainant caused the oppression. If the acts of the complainant were the direct cause of the oppressive conduct of which they now complain, the doctrine may properly be applied. A party cannot engineer a situation, provoke a response from the other shareholders, and then present that response as oppression to the court. In Cairney v. Golden Key Holdings Ltd., a British Columbia court found against a complainant who had applied the corporation’s seal to a mortgage without authority, diverted the mortgage proceeds to his personal use, and then defaulted on the payments, leaving the other shareholder to personally pay out the mortgage. In those circumstances, allowing the complainant to succeed in an oppression action would have permitted him to rely on his own wrong.
Where the complainant caused the deadlock. The clean hands doctrine applies with particular force in applications for winding-up on the just and equitable ground, where the applicant argues that the company cannot continue because of an irreconcilable breakdown between shareholders. Courts have consistently held that a person seeking a winding-up order must not themselves be responsible for the deadlock. If the applicant caused the lack of confidence between the shareholders, refused to meet with the other shareholders, or otherwise provoked the breakdown, they cannot then invoke the resulting deadlock to obtain a wind-up order.
Where the complainant’s conduct affects the remedy. Even where the clean hands doctrine does not bar relief entirely, the complainant’s conduct may affect what relief is granted and on what terms. A complainant with dirty hands may receive a lower valuation for their shares, suffer a minority discount that would not otherwise apply, or be denied a remedy in a specific form they prefer. The court can tailor the relief to account for the complainant’s own contribution to the situation.
In orders to purchase shares. Where a buyout order is sought, the complainant’s conduct can affect the price and terms of the purchase. Courts have applied a minority discount to a complainant whose own conduct contributed to the diminution in value they are now seeking to be compensated for, or who does not come to court with sufficient moral standing to demand a premium valuation.
What Does Not Trigger the Doctrine
It is equally important to understand what will not engage the clean hands doctrine in an oppression context.
The doctrine has no application merely because the complainant has asserted their rights, or exercised rights to which they were clearly entitled. A minority shareholder who demands access to corporate records, refuses to approve a resolution they consider unfair, or retains counsel to pursue their legal remedies has not acted improperly in any relevant sense.
Similarly, the doctrine is not engaged by the fact that the complainant had a self-interested motive for bringing the application, or that the relationship between the parties has become acrimonious. Acrimony is a normal feature of oppression disputes. A complainant who is angry, who has made demands the other shareholders found unreasonable, or who has taken aggressive positions in negotiations is not thereby disentitled to relief.
As noted in Dia-Kas Inc. v. Virani, the clean hands doctrine is not a hard and fast rule requiring the court to inquire into and assign blame whenever equitable relief is sought. When the question becomes one of relative fault as between the parties, the doctrine becomes largely irrelevant to the practical question of what should be done to bring the dispute to an end. Where both parties appear to be at fault but are unable to deal with each other on the previous harmonious basis, an equitable remedy may still be appropriate.
Serious Misconduct: A Higher Standard
The clean hands doctrine is at one end of the spectrum. At the more extreme end, there are cases where the complainant’s conduct is so serious that it goes beyond unclean hands and provides an affirmative justification for what the respondent did.
If a director or officer has been removed from management because there were strong and reasonable grounds to believe they had misappropriated corporate property or committed another serious wrong against the corporation, that removal is not oppressive. It is a legitimate exercise of management’s responsibility to protect the corporation. A management team that learns of serious wrongdoing by one of its members has both the right and the responsibility to act. Requiring that management tolerate a continuing threat to the corporation simply because the person responsible for the threat is also a shareholder with standing to bring an oppression application would invert the purpose of the oppression remedy.
In these cases, the court is not simply reducing the complainant’s remedy because of unclean hands. It is concluding that the respondent’s conduct was justified by the complainant’s own conduct, and that there was no oppression in the first place.
The Just and Equitable Winding-Up: A Stricter Standard
While the clean hands doctrine is applied with considerable flexibility in the oppression remedy context, the position is somewhat stricter when the relief sought is a winding-up or liquidation order on the just and equitable ground.
A winding-up order is a drastic remedy. It brings the corporation to an end. Courts have consistently held that a person seeking such an order must not themselves be responsible for the condition of the corporation that they are invoking as justification for winding it up. The clean hands requirement is, in this context, a genuine and meaningful threshold.
In Castilloux v. Mitchell, the court held that the applicant’s own conduct, which had led inevitably to his dismissal from the company, was itself a ground to disentitle him from the winding-up he was seeking. In In re Yenidje Tobacco Co., Ltd., the English Court of Appeal granted a winding-up where the shareholders’ relationship had broken down completely, but the analysis in that case makes clear that a party who has materially caused the breakdown faces a significantly more difficult task in obtaining the order.
The rule that the applicant must not be responsible for the deadlock is applied somewhat more flexibly in the oppression remedy context than in straight winding-up applications. But the underlying principle, that equity will not assist those who have created the very problem they are asking the court to remedy, runs through both bodies of case law.
The Doctrine in Derivative Actions
The clean hands doctrine is even less effective in the derivative action context, where a minority shareholder brings a claim on behalf of the corporation rather than in their personal capacity. The reason is structural: a derivative claim is brought for the benefit of the corporation as a whole, which means all shareholders and other stakeholders benefit from a successful outcome. Denying a derivative claim because of the personal conduct of the individual bringing it would effectively punish innocent third parties for that person’s behaviour.
Courts considering whether to apply the clean hands doctrine to derivative proceedings have generally declined to do so, or have done so only in the most egregious circumstances. The distinction between a personal oppression claim (which is subject to the doctrine in its usual form) and a derivative claim (which is substantially less vulnerable to it) is therefore a meaningful one in practice.
Practical Implications for Shareholders and Counsel
For Complainants
A shareholder who is considering an oppression application and whose own conduct has been imperfect should not necessarily be deterred from proceeding. The clean hands doctrine will not bar their claim simply because they have acted badly in some general sense, or because both sides have behaved poorly as the relationship deteriorated.
What matters is whether the specific misconduct is directly connected to the specific relief being sought. A shareholder who diverted corporate funds while demanding that the majority not exclude them from management has a more significant clean hands problem than a shareholder who simply had a hostile relationship with the other shareholders.
Complainants should assess honestly whether their own conduct is capable of being characterized as the direct cause of the oppression they are complaining about, or whether it would disentitle them to the specific relief they are seeking. Where it might, the choice of remedy matters: a complainant with significant unclean hands issues may be better positioned seeking a buyout at fair value than seeking a winding-up order.
For Respondents
The clean hands doctrine is a legitimate and sometimes effective defence, but it must be deployed carefully. A bare assertion that the complainant has not behaved perfectly will not succeed. Respondents must identify specific conduct by the complainant that is directly connected to the specific relief being sought, and must demonstrate that the connection between that conduct and the relief is immediate and necessary rather than collateral.
Respondents should also be aware that the doctrine is not symmetrical. The complainant’s bad conduct does not justify the respondent’s oppressive behaviour. The doctrine can disentitle the complainant to relief, but it does not transform the respondent’s conduct into something that was proper or legally defensible.
Whether you are a minority shareholder who has been oppressed and are concerned about how your own conduct may affect your claim, or you are a majority shareholder defending an oppression application, our shareholder disputes practice and commercial litigation practice advises on oppression remedies and corporate litigation in Ontario. Contact Grigoras Law to discuss your situation.
Conclusion
The clean hands doctrine occupies an important but carefully limited role in oppression remedy jurisprudence. It is not a strict precondition to relief, and courts have consistently resisted attempts to use it as an automatic bar to oppression claims by shareholders whose own conduct has been imperfect. In a context where disputes between closely-held shareholders are almost always characterized by mutual fault, imperfect behaviour on the complainant’s part rarely justifies denying relief entirely.
But the doctrine is not toothless. Where the complainant’s misconduct is directly and necessarily connected to the relief they are seeking, where the complainant caused the very breakdown or oppressive conduct they are now complaining about, or where the complaint is for a winding-up that the complainant’s own actions made inevitable, the doctrine can operate to reduce, shape, or in appropriate cases deny the remedy.
For anyone navigating a shareholder dispute in which conduct on both sides is an issue, understanding where the clean hands doctrine does and does not apply is an essential part of assessing the strengths and weaknesses of the case.
