In a judgment dated June 9, 2020, the Superior Court of Quebec in Autorité des marchés financiers v. Descheneaux, 2020 QCCS 1779 (Justice R. Mongeon) confirmed that passive reliance on a fellow director, more knowledgeable and experienced with the legal requirements of raising capital under applicable securities laws, is insufficient to ground a due diligence defence to a strict liability offence such as breaches to the Quebec Securities Act.
Mr. Descheneaux, an officer and director of delSECUR, faced 18 counts of breaches of the Securities Act, for distributing securities without a prospectus and for acting as an adviser without being registered as such. At trial, Mr. Descheneaux successfully raised a due diligence defence, arguing that:
- His involvement with delSECUR was focussed on the development of its technology
- He was not in charge of finding investors
- Descheneaux’s fellow director was in charge of finding investors and had the financial and securities knowledge and experience, on which Mr. Descheneaux relied fully
- Descheneaux’s fellow director had not informed him of the legal requirements of raising capital, nor warned him of the risks of non-compliance
- Descheneaux was in contact with potential investors to present the company, answer questions on the technology being developed and, on occasion, receive their cheques
- All investors were sophisticated and well aware of the risks of their investments
- Descheneaux was fully transparent with the potential investors and was in good faith throughout
- The funds invested were not embezzled or misused in any way; in fact, the investors lost their funds due to the impact of the 2008 financial crisis, through no one’s fault
The trial judge found that Mr. Descheneaux had acted as a reasonable person placed in the same circumstances would have acted, when relying on his knowledgeable and experienced fellow director, in good faith.
The AMF appealed the trial decision, arguing that Mr. Descheneaux had taken no proactive measures whatsoever to ensure compliance with the law, such that a due diligence defence should not be available to him.
The Quebec Superior Court agreed with the AMF and held that:
- Ignorance of the law cannot be excused by the absence of wrongful conduct or embezzlement, good faith, transparency, honesty, loyalty and/or even good business judgment
- Passive reliance on another, however competent, is insufficient to ground a due diligence defense
- A due diligence defence requires a showing that a person has proactively taken all reasonable steps and precautions – including making all reasonable inquiries – to avoid committing the offence with which he/she is charged
As Mr. Descheneaux had done absolutely nothing to avoid committing the offences with which he was charged (he had asked no questions of his fellow director, had made no inquiries), choosing instead to completely passively rely on his fellow director, the Superior Court found that the due diligence defence was not available to him.