3110-99-ES The Directors of Lava Systems Inc. Ian M. Halliday, Peter Hamilton, Brian J. MacDonald, Michael Nobrega, Donald Patterson and Barry J. Reiter, Applicants v. Brian MacDonald, Stephen Wilson and Ministry of Labour, Responding Parties.
Employment Practices Branch File No. 43001238
BEFORE: Mary Ellen Cummings, Alternate Chair.
APPEARANCES: Deborah Berlach for the applicants; Brian MacDonald and J. Stephen Wilson on their own behalf; Brian Blumental for the Ministry.
DECISION OF THE BOARD; August 17, 2000
1This is a directors' appeal of an Order to Pay pursuant to the Employment Standards Act (the Act). The directors of Lava Systems Inc. (“Lava”) were found to be jointly and severally liable for the unpaid wages and vacation pay for the employees of Lava when the company went bankrupt. The directors were protected by a "directors' and officers' liability" contract of insurance, and advised their insurer of the employment standards claim. The insurer agreed to pay the sums owed to the vast majority of employees, but brought this application with respect to an Order to Pay in favour of 3 persons; Brian MacDonald, Stephen Wilson and Geoff Redwood. Prior to the hearing, the issues with respect to Mr. Redwood were resolved. I have already issued a decision with respect to Mr. Redwood.
2Essentially, the applicants submit that Mr. MacDonald and Mr. Wilson are not entitled to recover from the directors because of the positions they held with Lava and the access to information that those positions afforded. Because of their positions, counsel argued, they were not in the same circumstances as typical employees for whom the directors' liability provisions in the Act are intended. Mr. MacDonald was the Vice -President of Marketing, and a director of Lava. Mr. Wilson was the Chief Financial Officer, and an officer of the corporation, but not a director. There is no dispute that both were "employees" of Lava and were employed under contracts of employment.
3Although the claim was filed in the name of all the directors, the appeal was advanced by the directors' insurers. There is, of course, nothing inappropriate about that. However, I note it only to explain that Mr. MacDonald, although one of the directors who brought the appeal, appeared personally to support the Order to Pay. To put it simply, Mr. MacDonald is a party on both sides of the issue.
4It is useful to set out the relevant statutory provisions:
58.20 …
(3) The wages that directors are liable for under this Part are wages, not including termination pay and severance pay as they are provided for under this Act, under a contract of employment, or under a collective agreement and not including amounts that are deemed to be wages under this Act.
(4) The vacation pay that directors are liable for is the greater of the minimum vacation pay provided in subsection 28 (2) and the amount contractually agreed to by the employer and the employee or his or her agent.
(7) The directors of an employer corporation are jointly and severally liable to the employees of the corporation for all debts not exceeding six months' wages, as described in subsection (3), that become payable while they are directors for services performed for the corporation and for the vacation pay accrued while they are directors for not more than twelve months under this Act and the regulations made under it or under any collective agreement made by the corporation.
5Counsel for the applicants argued that provisions making directors liable for the unpaid wages of corporations are an unusual departure from the principles of corporate liability. The provisions that make directors liable are rooted in the inequality of the position and information held by typical employees about the financial position of the company. In Fee v. Turner (1904), 13 Que. K.B. 435, the court explained the reasons for directors' liability provisions found in the ancestor to today's Canada Business Corporations Act:
For lack of any other reason it occurs to me that what must have been had in view, was to protect to a limited extent those who were employed by such companies in positions which do not enable them to judge with any special intelligence what is the company's real financial position. The directors have personally this knowledge or should have it, and if aware of the company's embarrassed affairs, and specially of the danger of a speedy collapse and insolvency, they continue to utilize the services of employees who have no means of securing this knowledge and who give their time and labour upon their sole reliance, often, on the good faith and respectability of the company's directors, it is not inequitable that such directors should be personally liable, within reasonable limits, for arrears of wages, thus given to their service.
6Counsel for the applicants argued that Mr. MacDonald and Mr. Wilson were not the types of employees for whom these remedial provisions were intended. First, both were in very senior positions, and no one knew more about the financial situation of Lava than did Mr. Wilson. When Mr. MacDonald and Mr. Wilson continued working for Lava, even when it stopped paying their salaries, they did it with full knowledge of the financial situation of the company. Indeed, as officers of Lava, they were responsible for its stewardship.
7Second, counsel argued, not only was Mr. MacDonald an officer, he was also a director. He is liable under the Act for the unpaid wages of Lava employees, yet also seeks to claim from his fellow directors, and indeed from himself. Surely, counsel argued, that is inconsistent with the remedial purposes of the Act.
8Counsel for the applicants relied on the decision of the Supreme Court of Canada in Barrette v. Crabtree Estate, 1993 CanLII 127 (SCC), [1993] 1 S.C.R. 1027. A group of senior managers were terminated when their employer became insolvent. They sued the corporation for wrongful dismissal and won. Because the company was not able to satisfy the judgement, they brought an action pursuant to the directors' liability provisions of the Canada Business Corporations Act. Section 114(1) of Canada Business Corporations Act provides that "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 such employee for services performed for the corporation…". The directors had been found liable at trial, which was reversed on appeal.
9Although the Supreme Court usefully traces the history of the directors' liability provisions in the federal statute and its object, the issue the Court had to determine is whether wrongful dismissal damages were a "debt… payable to each such employee for services performed for the corporation…". The court assumed without finding that the damages awarded were a debt, but concluded that the nature of the damages did not meet the definition of a "debt… payable to each such employee for services performed for the corporation…". The Court, in coming to that decision, referred to the context in which its decision was made. It noted that directors' liability is a departure from two fundamental principles; that no one is responsible for the debts of another and that typically directors are only prohibited from doing things. In contrast, these provisions place a positive obligation on directors to pay unpaid wages, with no exculpatory clause.
10Counsel for the applicants submitted that I should take guidance from the Court's narrow reading of the breadth of directors' liability in the circumstances before me, having regard to the purpose of such provisions.
11However, another part of the Supreme Court's decisions is just as apposite. The appellants had sought to rely on cases that had interpreted provincial labour standards legislation. The Court cautioned the relevance and assistance of such jurisprudence:
First, it is worth noting that provincial legislation provides, on a variety of conditions and to varying degrees, more or less extensive benefits for employees… Moreover, the Court of Appeal relied chiefly on the definition of the term "wages" in the Labour Standards Act … in concluding that the directors could be personally liable for the damages claimed for wrongful dismissal. That section reads as follows:
- In this Act:
(r) "wages" means all wages, salaries, pay, commission and any compensation for labour or personal services, whether measured by time, piece, or otherwise, to which an employee is entitled.
Without commenting on the conclusion reached by the Court of Appeal in that case, it is important to note that, like the legislation of New York State since 1952, the Saskatchewan legislature has formulated its own definition of the sums that may fall within the directors' personal liability. That is not the case here: the only benchmark provided by the wording of section 114(1) C.B.C.A. is the performance by the employee of services for the corporation.
[emphasis added]
12The comments by the Court in this excerpt are in my view, the most important principle in this case; in determining the extent of directors' liability, I should start with the express words of the enabling legislation. Section 58.20 (3) of the Employment Standards Act specifically makes directors liable for "…wages, not including termination and severance pay as they are provided for under this Act…" . There is nothing that relieves directors from liability for the unpaid wages of certain groups or types of employees, nor is there language that relieves directors from liability when an employee making the claim is also a director.
13In Re Rizzo & Rizzo Shoes Ltd., 1998 CanLII 837 (SCC), [1998] 1 S.C.R. 27, the Supreme Court of Canada, at paragraph 36, provided guidance about how the Employment Standards Act should be interpreted:
Finally, with regard to the scheme of the legislation, since the ESA is a mechanism for providing minimum benefits and standards to protect the interests of employees, it can be characterized as benefits-conferring legislation. As such, according to several decisions of this Court, it ought to be interpreted in a broad and generous manner. Any doubt arising from difficulties of language should be resolved in favour of the claimant.
14In the case before me, there are no difficulties of language; there is nothing in the Employment Standards Act that would disentitle either Mr. MacDonald or Mr. Wilson from collecting their unpaid wages from the directors. However, the Supreme Court's decision does reassure me that I should not look for reasons to deny the claimants.
15I want to add Mr. Wilson's response to counsel for the applicants' submission that he should be denied the right to claim from the directors because as the Chief Financial Officer he was in a better position than anyone to know the state of the company and make personal decisions based on that knowledge. Mr. Wilson agrees that he was as knowledgeable as anyone, but rejects that it gave him choices not available to other employees. He said that near the end, he and other senior managers were focusing all of their energies on selling part of the business, with the goal of saving the jobs of as many people as possible, an ambition that was in part met. Mr. Wilson submitted that if he as Chief Financial Officer had left Lava when it stopped paying his wages, it would have ended the delicate sale negotiations. In his view, by staying on he helped to salvage employment for many, and does not believe that in doing so, he should be penalized and denied the wages he forewent. Had I not been able to decide this case on the basis of the language in the Act, Mr. Wilson’s submissions would have been quite compelling.
DISPOSITION
16This application is dismissed. The monies being held in trust, and any interest thereon, should be released by the Director, Employment Standards, to Mr. Wilson and Mr. MacDonald as soon as practical.
“Mary Ellen Cummings”
for the Board