3401-99-ES Deborah Frances Boswell A Director of West Machinery Co. Limited, Applicant v. Winnifred Woods et al and Ministry of Labour, Responding Parties.
Employment Practices Branch File No. 53000307
BEFORE: Patrick Kelly, Vice-Chair.
APPEARANCES: Matthew G. Moloci, Deborah Frances Boswell, Erik Savas and Robert Spencer appeared on behalf of Deborah Frances Boswell A Director of West Machinery Co. Limited; No one appeared on behalf of Winnifred Woods et al; Murray Klein and Rick Hughes appeared on behalf of the Ministry of Labour.
DECISION OF THE BOARD; May 17, 2001
- This is an application for review of a director order to pay dated January 6, 2000, made pursuant to the Employment Standards Act, R.S.O. 1990, c. E.14, as amended (“the Act”). The order to pay was in respect of unpaid wages and vacation pay owing to employees of Tobac Curing Systems Limited (“Tobac”).
Background
By decision dated October 27, 2000, a differently constituted panel of the Board denied two preliminary motions of the applicant. The first motion dealt with the authority of the Employment Standards Officer, R. Hughes (“the Officer” or “Mr. Hughes”) to issue a director order in the absence of an order to pay against the employer with whom the director was associated. The Board found that, contrary to the applicant’s argument, the Officer had such authority. The second motion concerned the applicant’s contention that the decision of Tobac’s trustee in bankruptcy to disallow the employees claims under the Act rendered this matter res judicata. The Board rejected that argument, and as a result, the Board directed that the matter be listed for hearing. This decision deals with the matters raised in that hearing.
At the commencement of the hearing, counsel for the applicant made a motion to adjourn, and to set a date for the hearing of evidence on the discrete issue of certain alleged procedural irregularities which the applicant contends had the effect of depriving the Officer of jurisdiction to issue an order to pay. Thus, the order to pay should be “quashed”, and there would be no need to inquire further into the merits of the case.
Counsel for the applicant also justified the request for adjournment on the basis that the applicant was in the process of applying for judicial review of the Board’s decision of October 27, 2000, and that, if successful in that proceeding, no hearing on the merits would be necessary.
In the alternative, counsel for the applicant requested that the hearing proceed initially only with respect to the alleged procedural irregularities. Depending on the outcome of a determination as to whether or not the applicant had been denied natural justice as a result of those alleged procedural irregularities, the hearing would only continue on the merits if the Board determined that the applicant had been so denied. Counsel relied upon the decision of Referee Blair in Sanwa McCarthy Securities Ltd. [1993] O.E.S.A.D. No. 121 in support of conducting the hearing in this manner. He also provided the following cases: Beth-Mar Realty Investments Ltd., [1994] O.E.S.A.D. No. 226; Libbey Canada Inc. v. Ontario (Ministry of Labour) 1999 CanLII 1530 (ON CA), [1999] O.J. No. 246 (C.A.); and Re Downing and Graydon et al. (1978), 1978 CanLII 1424 (ON CA), 21 O.R. (2d) 292 (C.A.).
After considering the submissions of the participating parties, I issued the following oral ruling:
The Board is not inclined to grant an adjournment in this matter on the basis of the positions put forward by the applicant. Nor is the Board inclined to bifurcate the hearing into an inquiry into the alleged procedural irregularities, and a further inquiry into the merits of the application. The applicant is entitled to raise the procedural irregularity and natural justice issues which it sees as preliminary to a hearing of the merits, but it must do so within the context of a hearing of all the evidence and legal argument in this matter. In that regard, as the applicant, it bears the onus of proof and must put its case on the merits forward first.
The request for adjournment is denied. The request of the applicant to have the Board at the outset deal with the preliminary issues raised in counsel’s letter of December 29, 2000 is denied, without prejudice to the applicant raising these issues through the tendering of evidence and the submissions of legal argument in the hearing of the merits of this matter. To that end I am prepared to grant a short recess if both participating parties so desire to consult with one another regarding the possibility of stipulating agreed facts. Otherwise I expect the applicant to open its case with an opening statement followed by any evidence which it wishes to adduce.
With respect to the Officer’s conduct in this matter, the applicant complained that the Officer did not follow the Ministry of Labour’s Policy and Interpretation Manual as it pertains to section 12 investigations. The applicant appeared to contend that she was not aware of the reasons that the Officer determined Tobac and West were related within the meaning of the Act, until very late in the investigation, that the reasons were not adequate, and that she was not given enough time to respond. Nor, the applicant contends, did she understand what the Officer was asking of her when he informed her that she should make representations as to why she should not be held liable as a Director. Finally, the applicant argues that the Officer’s investigation failed to take into account certain information - some of which he was aware, some not - that in its totality should have caused him to decide against issuing the director order to pay. On this point, the applicant argued that section 58.22 confers upon an Employment Standards Officer a considerable discretion in deciding whether to make such an order. I shall return to the applicant’s interpretation of section 58.22 later in this decision.
The applicant’s concerns regarding the alleged procedural irregularities committed by the Officer and the resulting allegation of a denial of natural justice were not, in my view, of such a character as to deprive the applicant of a full opportunity to present its position on the merits of the issues of substance in this matter. In other words, the hearing, as a trial de novo, afforded the applicant every chance to show why the Officer erred in his determination that West and Tobac were related businesses under the Act, or why, in all the circumstances, an order to pay should not have been made against the applicant. To the extent there were any flaws in the Officer’s investigation, the applicant was not in any way prejudiced from making full answer before this Board. And although the applicant bore the onus of proof, the issue of onus was not determinative in this matter.
With one minor exception (to which I will return shortly), the parties who participated in the hearing were content to rely upon the facts as outlined by the Board in the decision of October 27, 2000. Those facts appear in paragraphs 4 through 15 of that decision, as follows:
The Director Order to Pay at issue is in respect of wages and vacation pay owing to employees of Tobac Curing Systems Limited (“Tobac”). Tobac went into bankruptcy on January 9, 1998. The sole director of Tobac was Robert John Boswell, Deborah Boswell’s spouse. Robert declared personal bankruptcy at or about the same time as Tobac. The employees to whom wages and vacation pay were owing at the time of Tobac’s bankruptcy were represented by a union. The union filed a proof of claim on the employees’ behalf with the trustee in bankruptcy of the estate of Tobac.
Deborah Boswell was the sole director of a company by the name of West Machinery Co. Limited (“West”). West went into bankruptcy at the same time as Tobac. West and Tobac were both represented by the same trustee in bankruptcy.
The Employment Standards Officer assigned to the matter sent a letter to the estate of West care of its trustee in bankruptcy on April 24, 1998, advising that the Ministry had received representation or evidence that West may be a related or associated employer to Tobac and sought representations with respect to the issue. On June 12, 1998, the Officer sent a letter to Deborah Boswell advising her of the fact that an investigation was ongoing with respect to whether Tobac and West were related and placing her on notice that she may, as a director of West, be liable for some of the wage entitlements owed to former employees. The letter indicates that, in the event a finding is made that section 12 does apply, she would be given an opportunity to make representations as to why a Director’s Order to Pay should not be issued. The letter suggests that Deborah Boswell may wish to review the matter with the trustee in bankruptcy for West.
On April 30, 1998, the trustee in bankruptcy forwarded the Officer’s April 24, 1998 letter to its counsel stating “[i]f section 12 were to be applicable, it could be held that West would then be liable for the employee claims of Tabac [sic] Curing Systems Limited which would certainly be to the detriment of the unsecured creditors of West.”
On September 9, 1998, the trustee in bankruptcy for Tobac and West wrote to the Employment Standards Officer setting out a long list of documents of both Tobac and West that had been produced to the Officer for his inspection. Many of the documents are documents that would be relevant to the Officer’s determination with respect to the section 12 issue. On November 12, 1998, the Employment Standards Officer wrote a lengthy letter to the trustee in bankruptcy setting out the criteria usually considered in the course of reaching a section 12 determination and the facts as he understood them. The Officer indicated that, based on the criteria and facts as he understood them, it was his position that West and Tobac were related employers. The Employment Standards Officer set out the reasons for his position. The Officer indicated that he was providing the trustee with an opportunity to make further representations in the matter.
On December 10, 1998, lawyers for the trustee in bankruptcy of Tobac and West wrote to the Employment Standards Officer setting out representations going to the section 12 issue. All of the criteria were reviewed and the facts as understood by the trustee set out. The letter reviews the relevant jurisprudence and argues that applying the jurisprudence to the facts as set out in the letter, a section 12 finding should not be made.
A number of further meetings, teleconferences and exchanges of correspondence took place between the trustee and the Employment Standards Officer. On September 27, 1999, lawyers for the trustee in bankruptcy wrote to the Employment Standards Officer. The letter commenced “Having now reviewed this matter at length, we are writing to you to outline the position of the Trustee with respect to the above noted matter.” The letter asserts that it is the trustee’s position that section 12 operates purely for the purposes of the Employment Standards Act and that a section 12 determination is of no effect in relation to proceedings under the Bankruptcy and Insolvency Act. The letter thus asserts that the former Tobac employees have no claim, even in the face of a section 12 finding, to the assets of West. The letter then asserts that the Officer cannot make a section 12 determination without first issuing an order to pay and that an order to pay cannot be issued absent leave from the Bankruptcy Court.
On November 4, 1999, the Employment Standards Officer wrote to Deborah Boswell and advised her that a determination had been made that West and Tobac were related employers under section 12 of the Act. The letter indicates that Deborah is being provided with an opportunity to make representations as to why a Director Order to Pay should not be issued to her as a former director of West.
On November 8, 1999, the Officer issued an Officer’s Narrative Report in which it is concluded that Tobac and West are related employers for the purposes of section 12 of the Act. On the same day, a proof of claim was filed in the estate of West.
On January 6, 2000, the order to pay at issue in the instant matter was issued to Deborah Boswell. As indicated above, the Director Order to Pay indicates that it was issued pursuant to section 58.23 of the Act as opposed to section 58.22.
On February 23, 2000, the trustee in bankruptcy of the estate of West disallowed the claim filed on behalf of the employees. The Notice of Disallowance of Claim read as follows:
NOTICE OF DISALLOWANCE OF CLAIM, RIGHT TO PRIORITY
OR SECURITY (Subsection 135(3))
IN THE MATTER OF THE BANKRUPTCY OF
WEST MACHINERY CO. LIMITED
A BODY CORPORATE WITH ITS HEAD OFFICE IN THE TOWN OF HAGERSVILLE OF THE REGIONAL MUNICIPALITY OF HALDIMAND-NORFOLK IN THE PROVINCE OF ONTARIO.
TAKE NOTE THAT, as Trustee acting in the matter of the bankruptcy of WEST MACHINERY CO. LIMITED, we have disallowed your claim to the extent of $82,768.48, pursuant to subsection 135(2) of the Act for the following reasons:
The individuals for whom you purport to act were not employees of West Machinery Co. Limited pursuant to the provisions of the Bankruptcy and Insolvency Act;
The filing of the proof of claim by the Ministry of Labour was done without any statutory authority under the Employment Standards Act;
The determination issued by the Ministry of Labour without the required Order to Pay is of no legal force or effect; and,
In addition and in any event, West Machinery Co. Limited was not a related employer pursuant to section 12 of the Employment Standard Act.
AND FURTHER TAKE NOTICE that if you are dissatisfied with our decision in disallowing your claim in whole or in part, you may appeal to the Court within the 30-day period after the day on which this notice is served, or within such other period as the Court may on application made within the same 30-day period allow.
DATED AT Hamilton, Ontario the 23rd of February, 2000.
Taylor Leibow Inc. – TRUSTEE
Per:
“illegible signature”
TO: Via Fax: 577-1200
Ministry of Labour Director, Employment Standards
1Jarvis Street, Main Floor
Hamilton ON L84 3J2
ATTENTION: Richard F. Hughes
No order to pay was ever issued as against Tobac, West or Robert Boswell. As a result of Tobac, West and Robert Boswell having declared bankruptcy, leave of the Bankruptcy Court to proceed with a claim would have had to have been obtained before an order to pay could have been issued against any one or more of them.
The Board went on to find that the Officer erred in purporting to issue the order to pay pursuant to section 58.23 of the Act, and concluded that it should have been made pursuant to section 58.22. That, however, did not alter the Board’s view that the Officer had the statutory authority to issue the order to pay.
The one fact found by the Board that was not accepted for the purpose of the hearing on the merits was the finding that Robert Boswell declared personal bankruptcy at the time of the bankruptcy of Tobac. The applicant contended that Mr. Boswell in fact made a proposal to his creditors which was ultimately accepted. The Ministry did not object to that fact as stipulated by counsel for the applicant, and thus for the purposes of this decision on the merits, I so find that Mr. Boswell avoided personal bankruptcy by making a proposal to his creditors which was accepted by his creditors. That finding plays a quite minor role later in this decision in the discussion regarding the disposition of wages.
The Evidence and Findings of Fact
We turn now to a consideration of the oral testimony given at the hearing of this matter. The applicant produced as its first witness Robert Spencer, a representative of the trustee in bankruptcy (“the trustee”) for both West and Tobac. Much of his evidence was a reiteration of the facts already established by the Board’s decision of October 27, 2000, the relevant portions of which are set out above. However, his testimony also established that neither the claimants nor the Ministry of Labour appealed the Notice of Disallowance of Claim issued by the trustee in bankruptcy for West on February 23, 2000. Mr. Spencer also provided some insights into the state of affairs of Tobac and West in late 1997, when the trustee became involved in the insolvency of Tobac. Mr. Boswell, Tobac’s owner, had apparently suffered a nervous breakdown, and was temporarily being treated at a psychiatric unit. The loss of Mr. Boswell’s leadership was the chief factor in an otherwise unremarkable insolvency scenario for which the trustee ultimately neither ascribed blame nor recommended censure. Mr. Spencer testified that the financial picture for Tobac was hopeless, and that there appeared little prospect of any significant distribution to either of Tobac’s secured or unsecured creditors, including West, which was owed nearly half a million dollars. Thus, West’s future was very much in doubt as well. By the time the trustee was formally appointed on January 10, 1998, following which a complete inventory of assets of both West and Tobac was taken, there was concern over a loss of small amounts of Tobac’s moveable items (tools, small equipment, and the like). As a result of certain inquiries undertaken by an unnamed person or persons, some of these items were returned to Tobac’s estate. In all, Mr. Spencer estimated that perhaps as much as $25,000.00 worth of moveable items was permanently lost. Mr. Spencer did not recall a specific communication of these circumstances of the bankruptcies to the Officer conducting the section 12 investigation, but he could not discount the possibility that he had informed the Officer of those circumstances.
The Proof of Claim filed by the Officer on behalf of Tobac employees against the estate of West (referred to in paragraph 12 of the Board’s October 27, 2000 decision) was in the amount of $104,918.50. About 20% of that amount was wages owing for work performed, and thus constituted a preferred claim by virtue of section 136 of the Bankruptcy and Insolvency Act, while the remainder, comprising vacation pay and termination pay, was unsecured. Some of the authorizations, completed by the claiming Tobac employees and empowering the Ministry to file the Proof of Claim, contained further authorization to settle the claim. The trustee was never informed of the Ministry’s mandate to settle some of the claims. Nor was the trustee aware that, in the event of its disallowance of the Proof of Claim, the Ministry had decided not to take part in any appeal pursuant to the Bankruptcy and Insolvency Act. Mr. Spencer was aware, however, that any appeal would be left up to the individual claimants, and that such an employee-initiated proceeding was a possibility. Mr. Spencer testified that the Officer indicated at one point that, if more could be obtained for the claiming employees from the estate of West than from Ms. Boswell, there would be no need to pursue the applicant in her capacity as a Director. Had the Proof of Claim been allowed by the trustee, there is no dispute that the impact on the unsecured creditors of West would have been a significant reduction in their portion of the distribution of West’s estate. Moreover, there is no dispute that Ms. Boswell would have had no remaining personal liability because the Tobac claimants would have had the portion of their claims for which Ms. Boswell was potentially liable satisfied by an allowance of the Proof of Claim.
Mr. Spencer indicated that Ms. Boswell was a creditor of West. Her secured claim for $145,626.33 against the estate of West was fully realized and paid to her. Her unsecured claim for $216,948.34 was partially realized, in the amount of approximately $70,000.00.
Ms. Boswell’s testimony also went over much of the factual groundwork already established in the Board’s decision of October 27, 2001, but she also provided the Board with information that assists in the determination on the merits. Ms. Boswell testified that the proceeds she received from the distribution by the trustee in bankruptcy were used by her and her family to live on, while she took up studies to advance her education. Her only assets at the time were a heavily mortgaged home and some modest savings in the form of registered retirement savings plans. She also explained that she earned very modest income from West over the years, but that she invested large amounts of her own money in the company (a subject we will return to shortly), ultimately to no avail, given its insolvency.
Ms. Boswell gave evidence concerning the background and history of Tobac and West. Tobac came into existence sometime in the 1960’s. Ms. Boswell’s father was a principal, and eventually her husband became involved in Tobac. It produced burners for curing tobacco, and it employed service crews who serviced and maintained the burners following their sale. Tobac joined with an entity called Dundas Foundry Company Limited in 1987 and commenced to produce air fans and garden products. The Officer found that the essence of Tobac’s business was metal fabrication, and that finding was not disputed by the applicant.
West, on the other hand, was a much older company, established near the beginning of the 1900’s. Initially it manufactured barges for the upstream transport of logs. Around 1981, the then owner became ill, and the business was available for sale. It was then that Ms. Boswell purchased the company and became its president and sole director and shareholder. Over the span of her association with West, Ms. Boswell testified that she personally invested as much as $500,000.00 in the company, in the form of equipment purchases necessary to West’s ongoing operations. The evidence concerning West’s business under Ms. Boswell’s ownership was sketchy. West was a machine shop and fabricating facility, operating out of the same premises as Tobac. It apparently made and sold certain products in its own right, including parts for equipment used in various commercial enterprises. To a far lesser extent, it also derived revenue from the rental of its machinery to Tobac, which machinery enabled Tobac to carry out its own production, and much of West’s.
In terms of the other common characteristics shared by Tobac and West, the evidence disclosed the following. Tobac’s employees produced the products of both Tobac and West, and West paid Tobac for the service of those employees. Tobac produced as much as 70% of West’s product. Mr. Boswell had primary signing authority for both organizations’ financial transactions, whereas Ms. Boswell had co-signing authority for both. (The Official Receiver’s examination of Ms. Boswell in January 1998, pursuant to West’s assignment in bankruptcy, reveals that Mr. Boswell and Tobac’s office manager maintained West’s books and records and monitored West’s financial position. Ms. Boswell never signed the transcript of the examination, but she did not dispute the finding contained therein at the hearing of this matter.) Tobac and West shared the same accountants, law firms and (as previously indicated) the same trustee in bankruptcy. They also utilized the same mailing address, telephone and facsimile numbers.
There was some dispute whether there were any employees employed by West or whether, during Ms. Boswell’s examination by the Official Receiver, she admitted West had no employees. The applicant led no evidence concerning the existence or identity of any employees of West.
Ms. Boswell’s evidence concerning the extent of her involvement in the day-to-day operation of West was somewhat contradictory. In examination-in-chief, she insisted that she was involved in West’s daily and weekly business. She described her involvement as pertaining to West’s financing and investment decisions. In cross-examination, she appeared to admit she was not directly involved in West’s operations on a daily basis. Her evidence in cross-examination is supported by her examination by the Official Receiver in January 1998. The transcript of that examination reveals that she only became involved in the daily business of West when West ceased operating, and that it was her husband, Mr. Boswell, who had operated West to that point.
As indicated earlier, Tobac’s employees were represented by a bargaining agent in their employment relations with Tobac. Ms. Boswell testified that she had no understanding of the terms of the applicable collective agreement, including the bargaining unit description. She stated that at no time did the bargaining agent attempt to connect Tobac to West for collective bargaining purposes.
Ms. Boswell confirmed Mr. Spencer’s account of the circumstances giving rise to Tobac’s sudden collapse at the end of 1997. Mr. Boswell simply became too ill to carry on, and as a result, he closed Tobac’s doors without any advance notice. Ms. Boswell testified that Mr. Boswell told her he had made a deposit with Tobac’s banker to cover payroll for the final period of work of the Tobac employees. There was no corroborating evidence offered in support of Ms. Boswell’s hearsay evidence on this point.
Ms. Boswell explained that Tobac had been experiencing financial difficulties leading up to Mr. Boswell’s illness, all of which appear to have taken their toll on his health. For example, the municipality in which Tobac operated seized some of Tobac’s equipment in satisfaction of property tax arrears. The dispute so unnerved a number of the employees of Tobac that they issued a letter to the municipality warning of the potential displacement of jobs, and asking to participate in a resolution. Ms. Boswell personally took out a loan – about $150,000.00 - to buy the equipment back from the municipality. She did so because Tobac was of primary importance to the business of West. Without the equipment, Tobac’s operations would be limited, and that would have had consequences for both Tobac and West. Ms. Boswell’s infusion of cash was made in the form of a loan to West, which in turn leased the equipment back to Tobac. The loan by Ms. Boswell to West was secured, and, as I have described earlier, upon the bankruptcy of West, Ms. Boswell’s claim as a secured creditor was honoured in full.
Mr. Hughes, the Officer, also testified in this proceeding. His evidence disclosed that, in determining whether to issue an order to pay against Ms. Boswell, he took into account two factors. He considered that Ms. Boswell received a substantial sum of money from the distribution in the West bankruptcy, whereas the employees of Tobac stood to get nothing from the estate of Tobac. Secondly, he noted that the vacation pay portion of the Tobac liability in respect of the Tobac employees had not been placed in trust as required by the Act. He admitted, further, that he was aware that, had the Proof of Claim filed with West’s trustee in bankruptcy been allowed at first instance, or on appeal, there would have been enough money in the West estate to satisfy the employee claims to the extent there would have been no recourse against Ms. Boswell as a director. He also gave evidence that the Ministry took the position that any appeal of a refusal to allow the Proof of Claim would lie with the employees affected, and that the Ministry would play no part in an appeal.
Decision
The relevant provisions of the Act in this matter are set out below:
(1) Where, before or after this Act comes into force, associated or related activities, businesses, works, trades, occupations, professions, projects or undertakings are or were carried on by or through more than one corporation, individual, firm, syndicate or association, or any combination thereof, and a person is or was an employee of any of such corporations, individuals, firms, syndicates or associations, or any combination thereof, such corporations, individuals, firms, syndicates or associations, or any combination thereof, shall be treated as one employer for the purposes of this Act, if the intent or effect of the arrangement is to defeat, either directly or indirectly, the true intent and purpose of this Act.
(2) The corporations, individuals, firms, syndicates or associations treated as one employer shall be jointly and severally liable for any contravention of this Act and the regulations.
58.19 (1) In this Part,
"director" means a director of a corporation and includes a shareholder who is a party to a unanimous shareholder agreement.
58.20 (1) The directors of an employer are jointly and severally liable for wages as provided in this Part if,
(a) where an employer is insolvent, the employee has caused a claim for unpaid wages to be filed with the receiver appointed by a court with respect to the employer or with the employer's trustee in bankruptcy and the claim has not been paid;
(b) an employment standards officer has made an order that the employer is liable for wages, unless the amount set out in the order has been paid or the employer has applied to have it reviewed;
(c) an employment standards officer has made an order that a director is liable for wages, unless the amount set out in the order has been paid or the employer or the director has applied to have it reviewed;
(d) an adjudicator or referee described in subsection (1.1) has made, amended or affirmed an order and the order, as made, amended or affirmed, orders that the employer is liable for wages or that the directors are liable for wages and the amount set out in the order has not been paid; or
(e) the Board has issued, amended or affirmed an order under section 68 or 69, the order, as issued, amended or affirmed, requires the employer or the directors to pay wages and the amount set out in the order has not been paid.
(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.
58.22 (1) If an employment standards officer makes an order against an employer under section 65 that wages be paid, he or she may make an order to pay wages, as described in subsection 58.20 (3), against some or all of the directors of the employer and may serve a copy of the order on them together with a copy of the order to pay against the employer.
(6) If an employer is insolvent and the employee has caused a claim for unpaid wages to be filed with the receiver appointed by a court with respect to the employer or with the employer's trustee in bankruptcy, and the claim has not been paid, the employment standards officer may issue an order to pay wages as described in subsection 58.20 (3) against some or all of the directors and shall serve it on them.
- (1) This section applies if an employment standards officer finds that an employee is entitled to wages from an employer.
(1.1) The employment standards officer may arrange with the employer that the employer pay the wages owing to the employee directly to the employee.
(1.2) The employment standards officer may order the employer,
(a) to pay the wages owing to the employee to the Director in trust; and
(b) to pay an amount equal to the greater of $100 or 10 per cent of the wages to the Director for administrative costs.
(1.3) The employment standards officer shall not make an order for an amount of wages greater than $10,000 in respect of one employee.
(1.4) Subsection (1.3) does not apply with respect to the following:
An order, or part of an order, relating to a failure to comply with a provision of Part XI, a contravention of Part XII, a failure to comply with section 50.1 or a contravention of section 50.3 or 56.1.
An order, or part of an order, to pay termination pay or severance pay in connection with a contravention of or failure to comply with a provision described in paragraph 1.
(1.5) The employment standards officer shall not make an order for an amount of wages in respect of one employee that is less than such amount as may be prescribed.
(1.6) Subsection (1.5) does not apply in the case of an order respecting more than one employee,
(a) if the total amount of wages payable under the order is greater than the amount prescribed under subsection (1.5); and
(b) if the wages become due to each employee by virtue of the same provision of the Act or the same provision of the employment contract.
(1.7) Subsections (1.2) to (1.6) do not apply with respect to wages that become due to the employee before the day on which subsection 19 (1) of the Employment Standards Improvement Act, 1996 comes into force.
(2) The order shall contain or have attached thereto information indicating the nature of the amount to be paid to an employee.
(3) The order may direct an employer to pay wages to one or more employees entitled to them because of the employer's failure to comply with one or more contracts of employment or with this Act and the regulations.
(4) The order must be served upon the employer either by mail addressed to the employer's last known address or,
(a) if the employer is an individual, personally upon him or her; and
(b) if the employer is a corporation, personally upon an officer of the corporation or a person in charge of any branch of the corporation.
(5) A certificate of the Director is evidence of the issuance, service and receipt of an order if, in the certificate, the Director certifies that the order was served and states the method of service used and if the certificate has a true copy of the order attached to it.
(6) Every employer to whom an order is issued under subsection (1) shall comply with it in accordance with its terms.
(7) If an employer fails to apply under section 68 for a review of an order issued by an employment standards officer, the order becomes final and binding against the employer even though a review hearing is held to determine another person's liability under this Act.
- (19) The Board may, with necessary modifications, exercise the powers conferred on an employment standards officer under this Act and may substitute its findings or opinions for those of the officer who issued the order or refused to issue the order.
(20) Without restricting the generality of subsection (19), the Board may,
(a) if the review is a review of an order, amend, rescind or affirm the order or issue a new order; and
(b) if the review is a review of a refusal to issue an order, issue an order or affirm the refusal.
- The applicant contended there was no basis for a finding of a section 12 liability. It was argued that West and Tobac were not related. In that regard, counsel for the applicant pointed out that in her evidence, Ms. Boswell disputed that Mr. Boswell was the controlling and common mind of both West and Tobac. He argued that West and Tobac served different markets. He submitted further that West was capable of operating independently of Tobac, and would have continued in business but for the heavy debt owed to it by Tobac. In addition, counsel relied upon the position as set out in the December 10, 1998 letter from the lawyers for West’s trustee in bankruptcy to the Officer, in which are offered detailed reasons why section 12 of the Act should not apply. That letter provides as follows:
December 10, 1998
VIA FAX & MAIL (577-1200)
Ontario Ministry of Labour
Employment Standards Program
1 Jarvis Street
Hamilton, ON
L8R 3J2
ATTENTION: Mr, R. Hughes
Employment Standards Officer, #473
Dear Sir:
RE: Tobac Curing Systems Limited and
West Machinery Co. Limited in Bankruptcy
Your File No. 53-00030
As you are aware we are the solicitors for the Trustee of West Machinery Co. Limited (West) in bankruptcy as well as Tobac Curing Systems Limited (Tobac) in bankruptcy and as such have been provided with your correspondence dated November 12, 1998 with respect to the above-noted matter. We are pleased to provide you as requested, the further representations on behalf of the Trustee with respect to your investigation.
Common Ownership:
By way of clarification, the Trustee understands as follows:
(a) the shares of 541599 Ontario Limited are presently held by Richard Pearson;
(b) Robert Boswell has never been a director of 541599 Ontario Limited.
Common Financial Control:
Both corporations had operating accounts at the Bank of Montreal in the Town of Simcoe. The Town of Simcoe is a relatively small town and thus it should not come as a surprise that for reasons of practicality, both corporations used the said bank.
While Tobac had a loan account with the Bank of Montreal, West did not. In the past, West had a loan account with Barclay’s Bank of Canada in London Ontario.
For routine legal matters, both corporations utilized the same local law firm. For other legal matters, Tobac retained the Toronto firm of Miller Thomson. West retained the Toronto firm of Kelly Affleck and Greene and subsequently its “spin-off” firm of Thornton, Grout and Finnigan.
Common Markets:
Tobac manufactured and sold tobacco drying equipment as well as harvesting machines for tobacco, peanut, tomato and apple farm operations and ventilating equipment. These products were sold directly by Tobac to its own customers.
West on the other hand, marketed and sold various machine components and sub-assemblies for:
(a) industrial boilers;
(b) zamboni ice machines, and
(c) a wide variety of industrial/commercial products.
Accordingly, the aforementioned markets appear to be separate and distinct, nor do they appear to be “niches” of one or the other
Use of Same Assets:
In 1988, Tobac obtained financing through the Federal Business Development Bank (FBDB) which then secured its loan against the equipment owned by Tobac.
In the period from 1991 to 1993, Tobac defaulted on its debt with FBDB which then acted upon its security. FBDB sold the equipment to West in August 1994.
West, in order to purchase the equipment from FBDB, obtained financing from S.D. Cohen Machinery Ltd. (an unrelated company) which secured these assets, along with obtaining a personal guarantee from Frances Deborah Boswell.
A formal lease was entered into between West and Tobac at the same time wherein Tobac leased the equipment from West commencing October 14, 1994 at a monthly rental of $4,000.00.
West, as owner of the equipment, did not “use” same. West did no manufacturing on its own. The manufacturing was sub-contracted to Tobac.
The only effect of the lease was to allow West to secure continued supply from its sole supplier, Tobac. It allowed Tobac to continue its operations and employment of its employees. In addition, although Tobac was West’s sole supplier, West was not Tobac’s sole customer.
Finally, the subject equipment was constructively seized by the Town of Simcoe pursuant to section 400(2)(d) of the Municipal act on or about March 2, 1995 wherein the said Municipality claimed a statutory lien upon same due to Business Tax arrears owed by Tobac.
Public and Internal Perception:
Based upon a review with the principals of West and Tobac respectively, the Trustee has no information in support of the notion that the employees “perceived themselves as working for both West and Tobac”.
The employees were represented by a union. The union contract was solely with Tobac. In fact, and during the course of Tobac’s dispute with the Town of Simcoe, the employees and their Union representative appeared to publicly view themselves as Tobac employees only.
Please find enclosed articles from the Simcoe Reformer dated June 23, 1997 and June 27, 1997 respectively. It is respectfully submitted that the employees’ contemporaneous perception be favoured as inherently more reliable to any recently expressed views to the contrary.
Other Matters:
It appears that section 161 examination of Frances Deborah Boswell on behalf of West was never sworn. We have been advised by Mrs. Boswell that she did not have the opportunity to review the information as recorded by Mr. Richard Morrison, Official receiver.
Legal Issues:
The test for an analysis of applicability of section 12 of the Employment Standards Act has been defined as follows.
There must be two or more business entities involved in the form of a corporation, individual, firm, syndicate or association or any combination thereof.
The activities, businesses, works, trades, occupations, professions, projects or undertakings must be associated or related.
The person claiming to be an employee of a common employer must have been or must presently be an employee of any one of the corporations, individuals, firms, syndicates, or associations during the period of time for which the benefits are claimed or the violation of the Act or Regulations took place.
The true intent or effect of the arrangement must be to defeat, either directly or indirectly, the true intent and purpose of the Act.
(see: Nu Forest Products (Canada) Ltd.(Re) [1991] E.S.C. 2865, at p6.
In addition, the meaning to be imputed to the term “arrangement” has been defined as follows:
“it is obviously not enough to have an association or relationship involving an arrangement together with circumstances in which the true intent and purpose of the act has been directly or indirectly defeated. There must be a connection between the two. In the absence of intent to defeat, there must be a direct or indirect cause and effect relationship between the arrangement and some actual defeat of the true intent and purpose of the act”.
(see: Avant Lithographics Inc. (Re) [1991] E.S.C. 2868, at p.4.
For the purposes of these submissions, the Trustee does not dispute the existence of number 1 and 3 as outlined above.
With respect to the second item in the above-noted test, it is the Trustee’s view that the activities, businesses, works, trades, occupations, professions, projects or undertakings are not associated or related in the instant case. The respective markets of Tobac and West as outlined above appear to be entirely distinct and separate. There were no shared customers, and the products sold by the respective companies were distinct and unrelated.
It is the Trustee’s view that number 4 of the aforementioned test has not been met as there was no arrangement which had the effect of defeating the true intent and purpose of the Act.
In the aforementioned case of Avant Lithographics Inc. it was asserted by the Ministry of Labour that the employers in this case by choosing not to invest further effort and money into the salvation of the existing business, constituted an arrangement as required by the Act. The Tribunal however concluded as follows:
“when someone is under no obligation to invest in an insolvent business, it seems to me a distortion of language to say that the business’s failure to pay its debts is an effect of that person’s having not invested. When C.G.I. became insolvent, those who later became principals of Avant were under no greater obligation than anyone else to make any further investment in it. Counsel for the Respondent acknowledged that the third party purchaser of the former C.G.I. assets would not have been liable for the wages and termination pay left unpaid by the debtor corporations. In practical terms, then, the real thrust of the argument advanced by counsel for Respondent is that those connected with a failed business should have to satisfy that business’s outstanding obligations to its former employees before or as a condition of becoming involved in another business. The Legislature could have said that. The issue before me is not whether it ought to have said that. The issue is whether it did. In my view, the Legislature did not go that far in section 12.” (at p.6).
In the instant case, the dealings between Tobac and West were to attempt to maintain the continuation of Tobac as an ongoing concern and thus the employment of Tobac’s employees. If it is a “distortion” of the language of the Act to impose liability due to the failure of persons to further invest in a failing business, it is only a further distortion to assert that the bona fide attempts of individuals to make such further investments would constitute an arrangement having the effect of defeating the Act. It would appear that the only reasonable interpretation of the facts in the instant case is that the effect of the efforts of West was to continue and extend the life of Tobac as an ongoing concern.
In addition, there is no evidence to support any inference that the debtor corporations shedded their assets to related entities in order to continue on business in another form. In fact, both corporations became insolvent and bankrupt resulting in the assets of both corporations vesting in the Trustee who ultimately disposed of the assets to unrelated third parties by way of tender in order to maximize the funds available to the creditors.
In insolvency situations, an “arrangement” pursuant to the Act has been found to exist where the parties proceeded in such a manner so as to preserve the assets for their own benefit in order to continue the business in another form. Examples of this can be found in the following cases:
Lampert Plumbing Ltd. (Re) [1995] E.S.C. 95-05;
Moorsehead Magazines Ltd. (Re) [1996] O.E.S.A.D. No. 170;
Ingo Inc. (Re) [1996] O.E.S.A.D. No. 264.
Accordingly, it would appear that the “activities, businesses, works, trades, etc.”, are neither associated nor related and moreover, there was no “arrangement” which had the effect of defeating the intent and purpose of the Act.
Yours sincerely,
W. Zimmerman
WZ:jc
Encl.
cc – Mr. Bob Spencer C.A.
Taylor Leibow Inc.
Secondly, counsel for the applicant contended, even if West and Tobac were related, there had been no arrangement whose intent or effect was to defeat, either directly or indirectly, the true intent and purpose of the Act. West and Tobac were simultaneously assigned into bankruptcy, and there was evidence that Mr. Boswell had attempted to ensure the employees of Tobac got paid wages owing prior to its insolvency. If anything, counsel argued, there was an attempt to protect the employees. Counsel for the applicant referred me to several cases in support of this prong of his argument: Algo Group Inc. (Re), [1999] O.E.S.A.D. No. 102; Vragovic (Re), [1994] O.E.S.A.D. No. 155; Re Avant Lithographics Inc. [1990] O.E.S.A.D. No. 199 (Gray); LGT Graphics Ltd. (Re), [1996] O.E.S.A.D. No. 142; Shirt-Man Inc. (Re), [1987] O.J. No. 2449 (H.C.J.); 550551 Ontario Ltd. v. Framingham, 1991 CanLII 7388 (ON CTGD), [1991] O.J. No. 1035 (Div. Ct.); Rizzo & Rizzo Shoes Ltd. (Re), 1998 CanLII 837 (SCC), [1998] S.C.J. No.2.
This appears to me to be a clear case of related businesses. West and Tobac operated under the same roof. Although they served different markets, both were in the business of metal fabrication and manufacturing. Contrary to Ms. Boswell’s bald assertions that Mr. Boswell was not the controlling mind of both companies, I find that he was. He had prime signing authority in respect of both Tobac’s and West’s financial affairs. Furthermore, the examination of Ms. Boswell by the Official Receiver indicates that Ms. Boswell agreed that Mr. Boswell, together with Tobac’s office manager, maintained West’s books and monitored its financial status. There was no attempt by the applicant to dispute the accuracy of that assertion at the hearing in this matter.
In terms of whether there was an “arrangement” as contemplated by section 12, the evidence was as follows. West owned the means of production for both companies in the form of the machinery. West had no employees. Tobac’s employees operated West’s machinery for the benefit of both companies. Tobac employees produced as much as 70% of West’s product. Contrary to the assertion by counsel for the applicant that West could have operated independently of Tobac but for the large and unrecoverable debt owed by Tobac to West, I find that that was not the case. The evidence was that West relied almost exclusively upon Tobac employees to produce its product. There was no evidence that West had access to any other available, alternative workforce. In short, it is hard to imagine a more symbiotic relationship (a characterization suggested by counsel for the Ministry) between two businesses.
In Re Avant Lithographics, supra, a decision referred to me by counsel for the applicant, the Referee considered the meaning of “arrangement” in section 12:
The word “arrangement” is not defined, nor is it used earlier in the section of the Act. The use of the definite article “the” to modify the word “arrangement” is unusual in those circumstances. It suggests that the draftperson considered the existence of an “arrangement” implicit in what is spoken of earlier in the section. The phrase “associated or related” seems the most likely focus of that implication. This suggests that the “arrangement” the draftsperson had in mind was either the result of, or the cause of, or in some way linked to the association or relationship between the activities on the entities in question. Thus, the word “arrangement” and the phrase “associated or related” help to define one another. If an arrangement is implicit in whatever makes two activities or businesses “associated or related”, then the mere fact that they are similar will not make two activities or businesses “associated or related”.
By itself, the word “arrangement” suggests something put in place (or at least concerning) two or more entities which somehow governs the relationship or association between them. It can be wider in meaning than “agreement”, and may embrace an informal or even legally unenforceable understanding. In some contexts, “arrangement”, connotes something of an on-going nature, but it is not clear whether its use here was intended to import that connotation. In any event, the word “arrangement” suggests voluntary, deliberate action.
There can be no doubt that the manner in which West and Tobac interacted with one another was ongoing, and as a result of voluntary and deliberate action on the part of the respective sole shareholders of each company. In that sense, there was an “arrangement” between them. And while there may have been no intention arising from the arrangement between West and Tobac to defeat the purposes of the Act, that was the effect of the arrangement. West utilized Tobac’s employees for its own purposes, much as if they were West employees. In the absence of evidence of any alternative workforce, I conclude that Tobac employees were integral to West’s ability to operate. Tobac and West maintained separate corporate identities, but operated on a day-to-day basis as though they were a common single enterprise, under the same roof, utilizing the same labour, engaged in the common activity of metal fabrication. There is nothing inherently wrong with the manner in which West and Tobac integrated their capital and human resources while maintaining separate corporate existences. But such arrangements, even if entered into in good faith, would otherwise have the effect of facilitating the avoidance of minimal statutory termination notice and severance obligations.
I find that West and Tobac were related businesses within the meaning of section 12 of the Act, and that the arrangement between them defeated the purposes of the Act.
I turn now to a consideration of the applicant’s argument concerning section 58.22. That argument presumes that the section confers upon the Employment Standards Officer (and hence the Board) a wide discretion in deciding whether to issue a director order to pay. The applicant contends that the Officer in this matter should have taken into account, among other things, such factors as the applicant’s personal circumstances, in exercising that discretion in favour of not issuing the director order to pay. I doubt that section 58.22 provides an Employment Standards Officer with a discretion of the kind urged by the applicant. Section 58.22 empowers an Employment Standards Officer to issue an order against a director if he or she makes an order against an employer under section 65 that wages be paid. The making of the order under section 65 is the only expressed prerequisite for the subsequent making of an order to pay against one or more or all directors. The Act imposes no obligation to consider any other criteria or factors in arriving at a decision to issue or not issue a director order to pay. In the absence of any other stated statutory criteria, to hold that there is a residual discretion conferred in section 58.22(1), as urged by the applicant, would in my view create a confusing, open-ended, and probably very lengthy process of fact-finding into every possible circumstance, personal and otherwise, to determine whether a director or directors should be held liable. That would run contrary to the scheme of the statute as a whole, which the Supreme Court of Canada described in Rizzo & Rizzo Shoes Ltd. 1998 CanLII 837 (SCC), [1998] 1S.C.R. 27, at paragraph 36, as:
…benefit-conferring legislation [which] …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.
In this case there was only one director of West, Ms. Boswell. It is not difficult to imagine scenarios in which an Employment Standards Officer may have to consider the liability of many directors of an employer. There will be also instances in which there are no directors, for example, where the employer is not a corporation. Or, there could be a situation where there are directors, but an Employment Standards Officer finds it impossible to find them or has no access to them. Finally, if an Employment Standards Officer is of the belief that the order to pay wages made against an employer under section 65 will be complied with, there may be no need to resort to the section 58.22(1) power to make an order against a director or directors. The Employment Standards Officers will have to assess the situation as they find them.
The purpose of Part XIV.2 of the Act, under which section 58.22(1) falls, is to provide a further layer of protection to the wages of employees employed by certain corporations. It is in effect the statutory means by which the corporate veil can be pierced in circumstances where the employees’ claim to wages might otherwise be frustrated. The purpose of Part XIV.2 of the Act, and specifically section 58.22(1), would not, in my view, be served by requiring Employment Standards Officers to consider the kinds of extraneous factors which the applicant says should have been considered in this case before any order to pay against Ms. Boswell was issued.
I find that the Officer in this matter did what the statute required. A proof of claim was filed on behalf of Tobac employees against Tobac. The Officer determined that the employees of Tobac would receive nothing from their insolvent employer, and were unlikely to have their claims resolved by the trustee in bankruptcy for West, a company subsequently found by the Officer to be related to Tobac through the mechanism of section 12 of the Act. West’s trustee in bankruptcy and its solicitor clearly conveyed resistance to the Tobac employees’ claim (a message later confirmed by the disallowance of the claim), which left the Tobac employees and the Ministry the option of an appeal under the Bankruptcy and Insolvency Act. The employees did not file such an appeal, and the Ministry, quite reasonably in my view, took the position that it would not use its resources to appeal those disallowances. The Officer further determined that Ms. Boswell was the sole director of West, that she was residing in Ontario, and that she would likely have the means to satisfy partially the Tobac employees’ claims. The statutory pre-conditions for an order to pay against Ms. Boswell were all present.
Putting aside my doubt that the word “may” in section 58.22(1) of the Act confers a residual discretion to consider the personal circumstances of a Director or other such extraneous factors, the evidence adduced before me concerning the circumstances of the bankruptcies and the personal circumstances of Robert Boswell and Deborah Boswell does not persuade me that I should substitute findings different from those reached by the Officer. The evidence about Mr. Boswell’s attempts to satisfy the Tobac payroll obligations was entirely hearsay evidence. In the absence of other corroborative evidence on that point, I give it little probative weight. Secondly, the evidence concerning the petty theft of Tobac’s property by persons unknown, or of Ms. Boswell’s investment efforts, her losses, and her personal financial condition do not, in my view, outweigh the interests of the claimants in receiving wages for their labour on behalf of the related companies. Finally, I put no weight whatsoever on the fact that the union representing Tobac’s employees made no application under section 1(4) of the Labour Relations Act, 1995, S.O. 1995, c.1 for a declaration that Tobac and West were related employers. I have found that West had no employees. There was no practical reason offered by the applicant as to why the union should have been motivated to make such an application. Accordingly, if, under section 58.22(1) of the Act, there is a discretion of the type urged by the applicant, I decline to exercise it in favour of the applicant. By virtue of the authority conferred on the Board by section 68(20), I affirm the Officer’s order to pay, because the evidence adduced in this matter does not persuade me that I should substitute my findings or opinions for those of the Officer’s pursuant to my authority to do so under section 68(19) of the Act.
Disposition
- The Officer’s order to pay was in the gross amount of $28,819.88, which amount covered twenty-seven former employees. It was acknowledged at the hearing that the gross amount should be offset by $278.55 representing a sum of money that was paid by Robert Boswell pursuant to his personal proposal to creditors, in respect of wages and vacation pay owing by him as a director of Tobac to former Tobac employees. It is not entirely clear to me how this small deduction should figure in the distribution to the twenty-seven employees. In any event, before I make any final orders, the applicant and the Ministry may wish to discuss this issue, as well as the manner of distribution of the funds that are payable as a result of this decision. They are directed to provide the Board and each other a copy of any written submissions concerning that distribution on or before May 30, 2001, following which I shall render a final decision.
“Patrick Kelly”
for the Board