Under section 119 of the Canada Business Corporations Act (the CBCA), the directors of a CBCA corporation may be held jointly and severally (or solidarily) liable to the corporation’s employees for up to six months of unpaid wages. However, when there is a unanimous shareholders’ agreement in place restricting all of the powers of the directors, is it fair for the directors to remain liable to employees under section 119 notwithstanding the restrictions on their decision-making power imposed by the unanimous shareholders’ agreement, or should the shareholders or some other person(s) instead assume the statutory liability to employees?
In a recent Quebec Court of Appeal decision, the appellate court found that, in the face of a unanimous shareholders’ agreement that had removed all powers from the directors, the individuals who directed the corporation and actually made decisions relating to the affairs of the corporation should be held liable to employees for six months’ worth of wages pursuant to section 119 of the CBCA as de facto directors.
In 1998, Inter-Canadian (1991) inc., a company experiencing financial difficulty, was purchased from Canadian Airlines by Société I.C.N. Delstar inc., a wholly-owned subsidiary of Canadian Eastern Airlines Ltd. The shareholders of Eastern were the defendants/respondents Robert Myhill, Michael Cochrane and Jay Lilge, all of whom were specialized in the acquisition and turnaround of troubled companies. In September 2008, all three defendants were elected directors of Inter-Canadian and, shortly thereafter, a unanimous shareholders’ agreement (or sole shareholder declaration) was signed by Delstar, Inter-Canadian’s sole shareholder, removing all of the powers from the defendant directors. It was established in evidence that this was designed to insulate the directors of Inter-Canadian from any liability.
In 1999, all three defendants resigned as directors and were not replaced leaving Inter-Canadian with no directors in office. In 2000, Inter-Canadian filed for bankruptcy and its employees subsequently filed five different actions in the provincial Court of Quebec against the three former directors claiming unpaid wages under section 119 of the CBCA. The actions were heard jointly by the Court of Quebec and were dismissed in a judgment rendered on February 23, 2005.
First instance decision
The Court of Quebec held that, despite the sale and due to a franchisor-franchisee type of relationship with its former shareholder, Canadian Airlines, Inter-Canadian remained entirely dependent on Canadian Airlines and did not have the capacity to make its own decisions. Consequently, any management acts undertaken by Myhill, who was in charge of the day-to-day business of Inter-Canadian, were done on behalf of Canadian Airlines. Furthermore, the Court of Quebec concluded the defendants could only have acted as officers of Inter-Canadian, and not as directors, since they had resigned as directors in 1999 prior to the company ceasing to carry on operations and, in any event, prior to their resignation, the unanimous shareholders’ agreement had stripped them of all powers. Thus, they could not be held liable to employees for any unpaid wages and the defendants were exonerated.
Court of Appeal decision
The Court of Appeal first addressed the right of the directors to resign and concluded that the general rule is a director of a corporation ceases to hold office when such director resigns and there is generally no reason to derogate from this rule. There is no duty of a person to remain a director of a corporation even in the face of financial difficulty.
The court then went on to address the issue of directors’ liability for unpaid wages. The court found that this obligation is a personal obligation on the part of those who hold the ultimate decision-making power within a corporation. Generally speaking, it is the directors who will be liable for unpaid wages under section 119 of the CBCA. However, when the directors do not in fact exercise control or have the power or right to exercise control over the affairs of a corporation, it is those individuals who do have control over the corporation, or the de facto directors, who will instead be liable. The court reasoned that a corporate entity can only ever act through an individual or natural person and there must ultimately be one or more individuals in control. For the purposes of section 119 of the CBCA, the liability for any unpaid wages will fall on such de facto director(s) who have the obligation to take the necessary measures to ensure employees are paid any wages and other sums due to them.
With respect to the particular facts of the case, the court concluded that the defendants did in fact control Inter-Canadian and were in a position to make decisions relating to the protection of employees even though they were no longer directors. Given that these three individuals did not take the necessary precautions to ensure the corporation had the funds required to pay the wages of the employees, the Court of Appeal overturned the first instance decision and the defendants were found liable under section 119 of the CBCA.
In the context of a unanimous shareholders’ agreement (or sole shareholder declaration) that strips all of the directors’ powers, any individuals, whether officers, former directors, representatives of shareholders or others, should take note that, in the event their course of conduct demonstrates a factual control over the affairs of the corporation, they may be held jointly and severally (or solidarily) liable to employees for unpaid wages under section 119 of the CBCA, as confirmed by the Quebec Court of Appeal in Allard v. Myhill.