When are Directors Liable for Wages Claims?

My colleagues Matt Certosimo and Jennifer Fantini were successful, on behalf of their clients, in their appeal of a decision of Madam Justice Backhouse (Stoody v. Robert Kennedy et al).  The judgment of the Court of Appeal is reported at Stoody v. Robert Kennedy et al. (March 23, 2005, C.A.).

The judgment is instructive in a number of respects, not the least of which is in clarifying those circumstances under which a director can be pursued and held liable for wage claims. 

Mr. Stoody sued his former employer, Westsun Show, for unpaid wages and wrongful dismissal. A trial was held before Justice Lane in 2001.  Neither Mr. Stoody nor Justice Lane was made aware of the fact that Westsun Show had no officers or directors.  Westsun Show's parent company, Westsun International, also had no directors. 

Mr. Stoody was awarded a judgment for $210,705 against Westsun Show in respect of commission, wages in lieu of notice, prejudgment interest and costs calculated as follows:

The plaintiff was awarded $171,442 for commission, $7, 366.67 for wages in lieu of notice, $16,175.57 for pre-judgment interest and $15, 721.05 for costs, for a total of $210,705. Judgment was taken out April 26, 2002."

Shortly after judgment was rendered, the Westsun group of companies was put into receivership at the request of the major lender.  According to Justice Backhouse:

The judgment remains unpaid. In this action, the plaintiff claims against the directors and officers of Westsun Show and Westsun International."

Both Westson Show and Westson International are companies incorporated under the laws of the Province of Manitoba. 

The appeals and cross-appeals were plentiful, on a host of issues. 

Was Mr. Davidson Required to Disclose That There Were No Directors or Officers?

Mr. Davidson was with counsel at trial on behalf of the Company.  He did not disclose to the Court or Mr. Stoody that there were no directors or officers.  According to the Court of Appeal:

[Justice Backhouse] held that Mr. Davidson “should” have disclosed this information and that his failure to do so constituted unfairly prejudicial or oppressive conduct within the meaning of s. 234 of the Manitoba Corporations Act. She held Mr. Davidson personally liable for Mr. Stoody’s costs of the first trial, which she determined were Mr. Stoody’s full legal costs incurred from the commencement of the first action. Those damages, exclusive of pre-judgment interest, were assessed at $37,358.44.

The Court of Appeal reversed this saying that:

I see no basis upon which to impose an obligation on Westsun Show to disclose corporate information to a party adverse in litigation. Imposition of such a duty is incompatible with both the duties owed by directors and officers to the corporation and with the operation of our adversarial system of law. Directors and officers owe fiduciary duties to the corporation, not to its current and former employees. The obligation to act honestly and in good faith, with the best interests of the corporation in mind, includes a positive duty to disclose to the corporation facts that may have an impact on the corporation. That duty does not extend to disclosing facts to current or former employees of the company.

It is not incumbent on a corporation to advise the other side to litigation about its corporate status, particularly where no request for such information has been made.

Although he had been invited to do so, Mr. Stoody "did not make a claim in the receivership for his unpaid wages and commission".  This appears to have troubled the Court of Appeal.

The Court further held, in any event, that personal liability for the costs could not follow.  According to the Court:

Mr. Davidson’s actions as corporate representative, a position into which he was thrust, were carried out honestly and reasonably. He gained no personal benefit by the allegedly oppressive conduct. Westsun Show did not act oppressively, either on its own or through Mr. Davidson. There is, therefore, no basis upon which to impose personal liability upon Mr. Davidson for Mr. Stoody’s legal costs of the first action.

The Court overturned this aspect of Justice Backhouse's decision.

Liability for Wages

The Court then considered the circumstances under which the directors could be liable for wages. 

The Manitoba Corporations Act provides, in part, as follows:

114(1) Directors of a corporation are jointly and severally liable to employees of the corporation for all debts not exceeding six months' wages payable to each of the employees for services performed for the corporation while they are directors respectively.

114(3) A director is not liable under this section unless he is sued for a debt referred to in subsection (1) while he is a director or within two years after he has ceased to be a director.

Mr. Stoody commenced actions against the directors on June 3, 2002.  One of the directors, Mr. Funk, had resigned as a director on June 1, 2000.  Justice Backhouse found Mr. Funk "jointly and severally liable" for wages along with the other directors.  He appealed.  The Court of Appeal reversed this finding on the basis that, "contrary to the requirements of s. 114(3), Mr. Stoody did not sue Mr. Funk within the requisite two-year period."

The preconditions to a director’s liability are contained in s. 114(2) of the Manitoba Corporations Act, and provide as follows:

114(2) A director is not liable under subsection (1) unless
(a) the corporation has been sued for the debt within six months after it has become due and execution has been returned unsatisfied in whole or in part; or
(b) the corporation has commenced liquidation and dissolution proceedings or has been dissolved and a claim for the debt has been proved within six months after the earlier of the date of commencement of the liquidation and dissolution proceedings and the date of dissolution; or
(c) the corporation has made an assignment, or a receiving order has been made against it under the Bankruptcy Act (Canada), and a claim for the debt has been proved within six months after the date of the assignment or receiving order.

The Court of Appeal considered each of the subsections and concluded that:

1. Section 114(2)(a) is not met as Mr. Stoody did not sue Westsun International within six months of the debt becoming due nor did he execute upon the judgment in the first action.
2. Section 114(2)(b) is not applicable as the corporation never commenced liquidation and dissolution proceedings.
3. Section 114(2)(c) is not satisfied as Mr. Stoody failed to (file or) prove a claim for the wage debt within six months after the date of the receiving order of Greer J. dated May 28, 2002.

Furthermore, the Court held:

The trial judge found that had Mr. Stoody filed a claim with the receiver nothing would have been paid on it and it would have been a “useless step”. In light of the receiver’s report that all wage claims were satisfied, there is no reasonable basis upon which to assume that Mr. Stoody would have recovered nothing had he proved a claim.  And, requiring an employee to first execute a judgment or file a claim in a receivership ensures that liability is not imposed on directors in circumstances where there are corporate assets to satisfy part or all of the wage claims. Thus, rather than amounting to a useless step, requiring strict compliance with the statutory pre-conditions serves a useful purpose. [Emphasis Added]

Mr. Stoody did not satisfy the preconditions to directors' liability and their appeal was allowed.

Liability of Senior Officers - Fiduciary Duties to Protect Employees?

Justice Backhouse, at trial, dismissed Mr. Stoody's claim against Mr. Kennedy and Ms. Grewar, who were senior officers of Wetson Show.  Mr. Stoody suggested that Messrs. Kennedy and Grewar:

[O]wed him a fiduciary duty to protect his “legitimate interests as an employee”. He submits that failing to establish a contingency fund amounted to a breach of that fiduciary obligation and that he is entitled to damages for the breach.

The Court dismissed the appeal, on the basis of the "uncontroverted evidence at trial" that, among other things, neither Messrs. Kennedy or Grewar had any power or authority to establish a contingency fund.   As such, the Court of Appeal was not required to consider, what it described as Mr. Stoody's In light of the foregoing, there is no need to decide Mr. Stoody’s "novel argument that Ms. Grewar and Mr. Kennedy, as officers of Westsun Show, owed a fiduciary duty to him, a fellow employee, and that failure to establish a contingency fund amounted to a breach of such a duty."

Liability Under Ontario Employment Standards Act

Mr. Stoody also suggested that Mr. Davidson should be liable for wages under the Manitoba Employment Standards Act.  The Court rejected this, and, thus agreed with the trial judge.  Specifically, Mr. Stoody was an Ontario employee, and the Manitoba Employment Standards Act did not apply.  The Ontario Employment Standards Act provided that the directors liability sections of the legislation do not apply to directors of corporations “that have been incorporated in another jurisdiction”.  Westson Show and Westson International were incorporated under the laws of Manitoba. 

This is a significant case, which clarifies those circumstances under which directors can be found liable for unpaid wage claims.  The Court of Appeal conducted its usual detailed and thorough analysis of a number of complex issues and, in so doing, have provided considerable guidance and direction regarding when liability will be imposed.