Sandor Vaszi v. Ministry of Labour, 2000 CanLII 12592

2876-97-ES SandorVaszi , Applicant v. Ministry of Labour, Responding Party.

2891-97-ES W. J. Cotton, Applicant v. Ministry of Labour, Responding Party.

2892-97-ES Louis Gorgenyi, Applicant v. Ministry of Labour, Responding Party.

2894-97-ES Steve Goregnyi, Applicant v. Ministry of Labour, Responding Party.

3395-97-ES Katharine E. Renison, Applicant v. Ministry of Labour, Responding Party.

3396-97-ES Charles Kosa, Applicant v. Ministry of Labour, Responding Party.

BEFORE: D. L. Gee, Vice-Chair.

APPEARANCES: Charles Kosa on his own behalf; Lawrence Pick for Katharine Renison; John W. Goldsmith for Sandor Vaszi, W.J. Cotton, Louis Gorgenyi and Steve Goregnyi; E. Cortzee for the Ministry of Labour.

DECISION OF THE BOARD; March 27, 2000

1. On October 20, 1997, an employment standards officer issued six orders to pay bearing order to pay numbers D 02201 through D 02206, each in the amount of $141,556.66, to Steve Gorgenyi, Louis Gorgenyi, William J. Cotton, Sandor Vaszi, Charles Kosa and Katharine Renison respectively. Each individual named was found liable for wages and vacation pay owing to individuals employed by Pathex International Ltd. (“Pathex”) prior to its bankruptcy on the basis that they were directors of Pathex. Each of the six individuals named filed a Director’s Application for Review of an Order to Pay pursuant to section 68 of the Employment Standards Act (the “Act”).

Sandor Vaszi, William Cotton, Louis Gorgenyi and Steve Gorgenyi

2. Sandor Vaszi, William J. Cotton, Louis Gorgenyi and Steve Gorgenyi were all represented by the same counsel and filed identical applications. The applications deny liability and dispute the quantum of vacation pay and wages found owing. At the hearing, counsel indicated that he supported the position being taken by Charles Kosa. Counsel made no submissions and did not call any evidence. Counsel left prior to the conclusion of the hearing. No submissions were filed on behalf of Sandor Vaszi, William J. Cotton, Louis Gorgenyi and Steve Gorgenyi as directed by the Board at the hearing.

3. The evidence before the Board establishes that Sandor Vaszi, William J. Cotton, Louis Gorgenyi and Steve Gorgenyi were all registered directors of Pathex and parties to a unanimous shareholders agreement (“USA”) dated March 3, 1992. Pursuant to section 58.19 of the Act, “director”, for the purposes of Part XIV.2 of the Act, is defined as a director of a corporation and includes shareholders party to a USA. Thus, Sandor Vaszi, William Cotton, Louis Gorgenyi and Steve Gorgenyi were directors of Pathex for the purposes of Part XIV.2 of the Act. No evidence was called to dispute the officer’s calculation of the amount of wages owing to the former employees of Pathex. The sole evidence called with respect to the amount of vacation pay owing to the former employees of Pathex was the oral evidence of Charles Kosa which he recanted following receipt of further clarifying information from the Ministry of Labour. As a result, it is apparent that Sandor Vaszi, William Cotton, Louis Gorgenyi and Steve Gorgenyi are jointly and severally liable for the amount of wages and vacation pay stipulated in the orders to pay. The applications filed by Sandor Vaszi, William J. Cotton, Louis Gorgenyi and Steve Gorgenyi are hereby dismissed.

Charles Kosa

4. The application filed by Charles Kosa asserts that the employment standards officer improperly calculated the amount of vacation pay owing. Mr. Kosa testified at the hearing in support of his position. Following the hearing, Mr. Kosa was provided with a copy of the records of employment that the Ministry of Labour relied upon in support of the officer’s calculation of outstanding vacation pay. Following receipt of such documents, Mr. Kosa wrote to the Board and withdrew his appeal. Having regard to Mr. Kosa’s request, Mr. Kosa’s application is withdrawn by leave of the Board.

Katharine Renison

5. The appeal filed on behalf of Katharine Renison disputes that Ms. Renison is liable for outstanding wages and vacation pay on the basis that Ms. Renison was never a director of Pathex. The corporate documents filed with the Board at the hearing of this matter establish that Ms. Renison never held the office of director with Pathex. Ms. Renison was, however, a shareholder in Pathex. Her shares were held in trust by her husband, Charles Kosa. While she is not a signatory to the USA, “Charles Kosa in trust” is.

6. In the Ministry’s submission, Ms. Renison was the beneficiary of a bare trust due to the existence of an agency relationship between herself and her husband. The Ministry relies upon Trident Holdings Ltd. v. Danand Investments Ltd., (1988) 1988 CanLII 194 (ON CA), 64 O.R. (2d) 65 (C.A.) in which the Ontario Court of Appeal held that, if the trustee is a bare trustee, the beneficiaries may be liable on contracts made by the trustee.

7. Both Ms. Renison and Mr. Kosa testified. The facts are not largely in dispute.

8. Pathex was incorporated in 1986 by Mr. Kosa and several workers who had worked for a previous company using the Pathex name. The initial directors of Pathex were Charles Kosa and William Cotton. Louis and Steve Gorgenyi and Sandor Vaszi were directors of an associated company set up to receive grants and hold assets.

9. In or around 1989, Pathex was in financial difficulty. Under a great deal of pressure from her husband, Ms. Renison advanced Pathex approximately $160,000 to $170,000 in return for which she was given non-voting preference shares. Ms. Renison raised the money by mortgaging her home and borrowing money from her father. Ms. Renison was the largest financial contributor to Pathex.

10. In 1991 a five-year shareholders’ agreement amongst the common shareholders of Pathex expired. It was decided that Pathex would amalgamate with the small business corporation. Redemption of preference shares or their conversion into common shares became an issue. The other shareholders did not want Ms. Renison to become a common shareholder and did not want her on the Board of Directors. The issue became quite contentious. It was resolved by Ms. Renison redeeming her preference shares for approximately 250,000 common shares that she agreed would be held by her husband in trust for her benefit. A Trust Agreement was executed to such effect on March 3, 1992. The Trust Agreement stipulates that Mr. Kosa had the sole right to vote the shares unless he died, became divorced from Ms. Renison or became totally disabled.

11. After the amalgamation in 1992, Ms. Renison was involved in the operations of Pathex. She provided her advice on a variety of issues including whether to move the plant and what legal counsel to retain. Ms. Renison’s advice with respect to moving the plant was ignored. The plant was moved over her objections. Ms. Renison’s advice with respect to shutting down Pathex and sending the employees home when the company showed signs of financial hardship was likewise ignored.

12. Ms. Renison drafted employment policies and provided input on banking and financial issues. Ms. Renison met regularly with Pathex’s bankers. Ms. Renison would discuss Pathex issues with her husband and attended some meetings. Ms. Renison was privy to monthly financial statements and participated in discussions pertaining thereto. Ms. Renison had an interest in staying apprised of the financial state of Pathex given her financial investment. Ms. Renison would give instructions to the accounting and clerical staff although her instructions could be overruled by one of the other shareholders. In 1996, Ms. Renison was given an office at Pathex. She was at the premises more frequently than once a week.

13. Mr. Kosa and Ms. Renison held between them 48 and 49 per cent of the shares of Pathex.

14. Section 58.19 defines a “director” as including a “shareholder who is a party to a unanimous shareholder agreement”. Thus, had Ms. Renison executed the USA, she would be a director for the purposes of Part XIV.2 of the Act. Ms. Renison did not execute the USA. Charles Kosa in trust is a party to the USA and Ms. Renison is a beneficiary pursuant to the trust. The Ministry of Labour submits that, given the true nature of the relationship between Ms. Renison and Mr. Kosa, she should be considered as a signatory to the USA.

15. The Ministry of Labour relies on Trident Holdings Ltd., supra. In Trident Holdings Ltd., the trial judge held that Danand Investments Ltd. (“Danand”) and six other defendants, who were the beneficiaries of a trust of which Danand was the trustee (hereinafter referred to collectively as the “beneficiaries”), were liable to Trident Holdings Ltd. (“Trident”) for breach of a written contract. All of the defendants appealed. The beneficiaries appealed on the basis that the trial judge erred in holding that on the contract between Trident and Danand the beneficiaries could be liable as principals.

16. Morden J. A., writing for the Ontario Court of Appeal expressed the issue before it as whether the trial judge was correct in his determination that a relationship of principal and agent existed as between the beneficiaries and Danand. Prior to reviewing the facts of the case, Morden J. A. set out the following passage from Scott, The Law of Trusts, 4th ed. (1987):

An agent acts for, and on behalf of, his principal and subject to his control; a trustee as such is not subject to the control of his beneficiary, although he is under a duty to deal with the trust property for the latter’s benefit in accordance with the terms of the trust, and can be compelled by the beneficiary to perform this duty. The agent owes a duty of obedience to his principal; a trustee is under a duty to conform to the terms of the trust. [Vol. 1, p.88].

A person may be both agent of and trustee for another. If he undertakes to act on behalf of the other and subject to his control he is an agent; but if he is vested with the title to property that he holds for his principal, he is also a trustee. In such a case, however, it is the agency relation that predominates, and the principles of agency, rather than the principles of trust, are applicable [Vol. 1 p. 95].

The beneficiaries of a trust are not subject to personal liability to third persons on obligations incurred by the trustee in the administration of the trust.

The situation in the case of a trust is very different from that which arises in the case of an agency. An agent, acting within the scope of his employment, can subject his principal to personal liability in contract and in tort. A trustee is in an entirely different position. He is not empowered to act on behalf of the beneficiaries personally, and does not act subject to their control. His position is one of greater independence. His duty is to administer the trust property in accordance with the terms of the trust. He may have power to subject the trust property to the claims of third persons, but he is not an agent of the beneficiaries and has no power to subject them to such claims…[Vol. IIIA, pp. 519-20].

It is true, however, that a trustee may be an agent as well as a trustee. Where he is a trustee because he holds the legal title to the trust property, but where in addition he has undertaken to act for the beneficiaries under their control, he is also their agent, and as such can subject them to personal liabilities by acts done by him within the scope of the employment. Where the trustees are also agents of the beneficiaries, the beneficiaries are personally liable upon contracts made by the trustees in the administration of the trust, unless it is otherwise provided in the contracts. So also the beneficiaries are liable to third persons for torts committed by the trustees in the administration of the trust if they are also agents of the beneficiaries.

… Where a business trust is created, that is a trust for the carrying on of a business in which the interests of the beneficiaries are represented by transferable certificates, the beneficiaries may become personally liable upon obligations to third persons incurred by the trustees in the administration of the trust. By the weight of authority it is held that the beneficiaries are not personally liable if the trustees are merely trustees. But where the beneficiaries have power to control the conduct of the trustees to such an extent that that the trustees are their agents, the beneficiaries are personally liable as principals… It is not always easy to draw the line between trust and agency in such cases, since the difference is one of degree. Where there is sufficient power of control over the trustees so that there is an agency relationship and not merely a trust, the beneficiaries are liable as partners in the carrying on of the business [Vol. IIIA, pp. 520-21].

17. The terms of the trust in issue in Trident Holdings Ltd. were found by the Court of Appeal to confer no powers or discretions on the trustee and to implicitly, if not explicitly, define the trustee’s function as holding the legal title to land and to do the bidding of the beneficiaries. Further, the agreement in issue contained a provision which the Court of Appeal found to contemplate that the beneficiaries would be liable on contracts.

18. On the basis of the law and the facts before it, the Court of Appeal concluded that, in so far as the contract with Trident was concerned, Danand was not exercising any power or discretion conferred on it by the trust agreement but was carrying out the mandate of the beneficiaries. The Court found the agency relationship to predominate over the trust relationship.

19. The Ministry of Labour argues that, based the true nature of Ms. Renison’s relationship with Mr. Kosa, she was much more than the beneficiary of a trust. In the Ministry’s submission, Ms. Renison and her husband had an agency relationship and thus Ms. Renison was the beneficiary of a bare trust. Based on Trident Holdings Ltd., the Ministry submits that Ms. Renison is therefore liable as if she were signatory to the USA.

Decision

20. Section 58.19(1) of the Act defines “director” as follows:

“director” means a director of a corporation and includes a shareholder who is a party to a unanimous shareholder agreement.

The general purpose of Part XIV.2 of the Act was to bring the provisions of the Ontario Business Corporations Act (“OBCA”) dealing with director liability for wages into the Act and provide for a method of enforcement. Part XIV.2 of the Act should thus be considered with the following provisions of the OBCA in mind:

108(1) A written agreement between two or more shareholders may provide that exercising voting rights the shares held by them shall be voted as therein provided.

(2) A written agreement among all the shareholders of a corporation or among all the shareholders and one or more persons who are not shareholders may restrict in whole or in part the powers of the directors to manage or supervise the management of the business and affairs of the corporation.

(3) Where a person who is the beneficial owner of all the issued shares of a corporation makes a written declaration that restricts in whole or in part the power of the directors to manage or supervise the management of the business and affairs of a corporation, the declaration shall be deemed to be a unanimous shareholder agreement.

(4) Subject to subsection 56(3), a transferee of shares subject to a unanimous shareholder agreement shall be deemed to be a party to the agreement.

(5) A shareholder who is a party to a unanimous shareholder agreement has all rights, powers, duties and liabilities of a director of the corporation, whether arising under this Act or otherwise, to which the agreement relates to the extent that the agreement restricts the discretion or powers of the directors to manage or supervise the management of the business and affairs of the corporation and the directors are thereby relieved of their duties under section 131, to the same extent.

(6) A unanimous shareholder agreement may, without restricting the generality of subsection (2), provide that,

(a) any amendment of the unanimous shareholder agreement may be effected in the manner specified therein; and

(b) in the event that shareholders who are parties to the unanimous shareholder agreement are unable to agree on or resolve any matter pertaining to the agreement, the matter may be referred to arbitration under such procedures and conditions as are specified in the unanimous shareholder agreement. 1982, c.4, s.108

131(1) The directors of the corporation are jointly and severely liable to the employees of the corporation for all debts not exceeding six months wages that become payable while they are directors for services performed for the corporation and for the vacation pay incurred while they are directors for not more than 12 months under the Employment Standards Act, and the regulations there under, or under any collective agreement made by the corporation.

21. A director is someone who has the power and duty to manage the business affairs of the corporation. Where no USA exists, a director is not subject to shareholders’ control in the exercise of his or her powers. In the absence of an USA, directors have the power to make decisions that directly impact on whether the business will be in a position to pay employees their vacation pay and wages. The OBCA thus renders them liable where their decisions result in a situation where employees are not paid.

22. A director’s powers can be limited by a valid USA. A USA allows the shareholders to effectively take over the powers that would otherwise belong to the directors. In such cases, given that the shareholders have the power to make decisions that affect whether the business will be able to pay its employees their vacation pay and wages, it is the shareholders that are made liable in the event of default and not the directors.

23. It is apparent that the OBCA and the Act are designed to impose liability on the individuals who have the power to make decisions for the corporation that will directly impact on the corporation’s ability to pay its employees. No liability is imposed on officers or senior management of a corporation notwithstanding that such individuals typically have considerable influence with respect to the operation of the corporation. Liability is imposed on directors or shareholders signatory to a USA alone as it is those individuals who have ultimate control over the decisions made by the corporation.

24. Turning then to the instant matter, I will assume without finding that, if Ms. Renison is the beneficiary of a bare trust, she is liable as a director under the Act.

25. I am not persuaded on the facts before me that Ms. Renison is the beneficiary of a bare trust. Based on the legal analysis set out in Trident Holdings Ltd. and the intent of Part XIV.2 of the Act, I would have to find that Ms. Renison was in fact in a position to control how Mr. Kosa voted her shares. The evidence before me does not lead to such a conclusion.

26. There is no doubt that Ms. Renison was a significant investor in Pathex and, given her need to repay the money invested, was keenly interested in the company’s affairs. There is no doubt that Ms. Renison played an active part in Pathex and provided the directors with valuable insight and advice. The Act does not impose liability, however, on advisors or investors. It imposes liability on those who have the power and responsibility to make decisions that impact on the corporation’s ability to pay. The law of trust does not find an agency relationship simply because the principal has a financial or personal interest, rather, the agent must be subject to the control of the principal.

27. The Trust Agreement specifically states that Mr. Kosa had the sole right to vote the shares. Both Ms. Renison and Mr. Kosa testified that the shares were voted by Mr. Kosa as he pleased. Ms. Renison specifically testified that Mr. Kosa voted her shares as he pleased even when she did not agree with what he wanted to do. Ms. Renison testified that she had no control at all over how the shares were voted. I have no reason to doubt the testimony of Mr. Kosa and Ms. Renison. No evidence was called by the Ministry of Labour to contradict that of Ms. Renison and Mr. Kosa. While Ms. Renison’s investment in Pathex and active involvement in the day to day activities of the company as well as her marital relationship with Mr. Kosa might have raised an inference that she has influence over how Mr. Kosa voted her shares, I am not willing to draw such an inference in the face of the credible evidence to the contrary.

28. Thus, I am not persuaded that Ms. Renison had control over the manner in which her shares were voted. The intent of Part XIV.2 of the Act is not to make an individual in Ms. Renison’s position liable. The law of trust does not make the relationship between Ms. Renison and Mr. Kosa a relationship of agent and principal. As a result, it is my determination that Ms. Renison is not a director for the purposes of the Act.

Disposition:

29. Having regard to the foregoing I hereby affirm order to pay D 02201 through to and including D 02205 issued to Steve Gorgenyi, Louis Gorgenyi, William Cotton, Sandor Vaszi and Charles Kosa and rescind order to pay D 02206 issued to Katharine E. Renison.

“D. L. Gee”

Adjudicator/Referee

This decision is issued under the administrative auspices of the Ontario Labour Relations Board, 505 University Avenue, 2nd Floor, Toronto, Ontario, M5G 2P1