Personal liability of directors for unpaid wages under the oppression remedy

Introduction

Under the law, corporations are treated as separate legal entities. This means that individuals acting on behalf of a corporation, such as directors, are generally protected from personal liability for wrongful acts committed by the corporation. Nonetheless, there are certain scenarios that can pierce this “corporate veil” and expose a director to personal liability. One of the most significant and frequently discussed risks for a director’s personal liability is unpaid employee wages. Both federal and provincial legislation specifically provide that directors can be held personally liable for unpaid wages.

The basis for finding a director personally liable was extended this year by the Ontario Superior Court in El Ashiri v Pembroke Residence Ltd., 2015 ONSC 1172, 2015 CarswellOnt 2424, (“El Ashiri”) where the judge found a director, and his Estate, to be liable for unpaid wages and other employment amounts under the oppression remedy, instead of relying on the provision in the OBCA that specifically attributes liability for unpaid wages to directors. This case will be discussed in greater detail below.

Applicable Corporate and Employment Statutory Provisions

Section 119 of the Canada Business Corporations Act (the “CBCA”)¸¹ section 131 of the Ontario Business Corporations Act (the “OBCA”),² and sections 80 and 81 of the Ontario Employment Standards Act, 2000 (the “ESA”),³ specifically provide that directors can be held liable for up to six months’ unpaid wages if certain pre-conditions are met. Under the OBCA a director can only be held liable if: 1) the corporation is sued for the unpaid wages but is not able to pay them; or 2) before the corporation and director are sued, the corporation goes into liquidation, is ordered to be wound up, or goes bankrupt. Similar pre-conditions are required under the CBCA, except that in the CBCA an employee must first seek recourse against the corporation before looking to the director, and the suit must be commenced within 6 months of the wages being due. These are not required per the OBCA.

The ESA provision is also similar; however, like the OBCA, proceedings under ESA against an employer do not have to be exhausted before an employee can proceed against his or her employer’s directors for unpaid wages.

The above mentioned legislative provisions state that a director can be held liable for “all debts”. The courts have interpreted “all debts” to mean amounts that constitute debt for services that the employees have performed for the corporation.⁴ This includes unpaid wages, vacation pay, reasonable travel and out-of-pocket expenses, and employment benefits. A director’s liability under these sections has not, however, been extended to include termination and severance payments that may be owing by the corporation.⁵

The Oppression Remedy in El Ashiri

The oppression remedy is an equitable remedy available to “stakeholders” including  shareholders, creditors, directors and officers, whose legitimate expectations have been infringed upon by corporate actions. This remedy is applied to discourage corporations from acting in a way that is oppressive, unfairly prejudicial to, or disregards the interests of, a stakeholder. It is most commonly used by minority shareholders.

In the unprecedented case of El Ashiri, Justice Boswell used the broad oppression remedy to find a director personally liable for unpaid wages in addition to other employment related debts. The two plaintiffs in this case worked as managers at hotels owned by two separate corporations with a common sole director and officer. The plaintiffs did not receive their wages for extended periods of time, and thus sued their respective corporate employers and the sole director and officer, Mr. Mehboob Dewji, personally. Mr. Dewji died before the matter was resolved, but the plaintiffs each obtained an order to continue their actions against his Estate.

The Court found that the Estate of Mr. Dewji was liable for the unpaid wages, thereby attributing personal liability to the deceased director. The Court relied on the oppression remedy provision of the OBCA, section 248, which provides as follows:

(1) A complainant and, in the case of an offering corporations, the Commission may apply to the court for an order under this section.

(2) Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates,

(a) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result;

(b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or

(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,

that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of.

In El Ashiri, Justice Boswell was satisfied that employees with unpaid wages fit within the category of ‘creditors’ in section 248 to provide them with compensation. In arriving at this conclusion, Justice Boswell found that Mr. Dewji’s payment to his companies’ preferred creditors, but never paying the plaintiffs’ wages, was oppressive. As such, the Defendant was found to be personally liable not only for each of the plaintiffs’ wages (including overtime where claimed), statutory holiday pay and vacation pay, but also notably for termination pay (which otherwise would have not been awarded if Section 131 of the OBCA was invoked).

Discussion

It is not clear why Justice Boswell found Mr. Dewji liable under the oppression remedy. There is no guidance in the decision, nor is there any indication that the Court considered the possibility of relying on Section 131 of the OBCA or 80 and 81 of the ESA. However, some possible reasons may be: it allowed the plaintiffs to be awarded compensation in excess of six months wages; it allowed compensation for termination pay; and it allowed the judge to find liability against the Estate, therefore avoiding the limitations that would have been otherwise imposed. It is likely due to policy reasons that these provisions limit a director’s personal liability to six months’ unpaid wages, and this policy was ignored by Justice Boswell. In fact, other courts have held that the oppression remedy is generally not an appropriate remedy for employment related issues such as wrongful dismissal.⁶ Nonetheless, Justice Boswell applied this remedy in the employment context without providing any justification for his decision. It will be interesting to see how the courts will interpret El Ashiri and if the decision will be appealed.

Closing

The decision in El Ashiri, which is surprising to say the least, has the potential to change the landscape of directors’ personal liability. Time will tell if this decision is upheld and how it will be interpreted; however, in the mean time, it reinforces the notion that the courts are not reluctant to pierce the corporate veil in order to protect the often powerless employees. Unpaid wages pose a substantial personal liability risk to directors that should never be taken lightly.  

If you have any additional questions about El Ashiri or director’s personal liability risks and how to avoid them, please contact us.