Ontario Court Uses Oppression Remedy to Find Director Personally Liable for Wrongful Dismissal Damages
A recent Ontario Superior Court of Justice decision in El Ashiri v. Pembroke Residence Ltd. has expanded the circumstances in which a director of a corporation may be liable for debts owed to employees or former employees of the corporation, and the scope of that potential personal liability. The Court in El Ashiri used the oppression remedy under the Ontario Business Corporations Act (“OBCA”) to impose personal liability on a director for amounts owing to two employees, including amounts for unpaid wages, vacation and holiday pay, and pay in lieu of notice.
The Oppression Remedy and Statutory Provisions for Unpaid Wages
Generally speaking, our system of corporate law is premised on the principle that corporations are distinct entities that incur their own debts and obligations. With limited exceptions, directors or other employees of a corporation are not liable for the debts and obligations of the corporation.
Notwithstanding this general restriction on personal liability, Courts will “pierce the corporate veil” and find directors liable for corporate obligations in certain circumstances. One such circumstance is where a director is found to have caused the corporation to contract with a party when he or she knew or ought to have known that the corporation was incapable of paying or did not intend to pay on the contract. In addition, the OBCA has prescribed an “oppression remedy” through which an aggrieved party can seek damages against the corporation and its directors for oppressive conduct carried out by a corporation. Traditionally, Courts have been reluctant to use the oppression remedy to impose liability for damages for wrongful dismissal except in certain limited circumstances.
In the employment context, section 131 of the OBCA and section 81 of the Employment Standards Act, 2000 (“ESA”) each provide that directors are liable to employees for unpaid wages up to a maximum of six months’ wages with certain preconditions. The ESA provision is clear that “wages” in this context excludes termination pay or severance pay as prescribed by the Act or payable under an employment contract. The OBCA provision contemplates liability for “all debts” of the corporation but this has been found not to include termination pay or severance pay under statute or at common law. In this regard, while Courts have found that the phrase “all debts” includes amounts owing to employees on account of services provided to the corporation, termination pay and severance pay payable on account of the loss of employment are not amounts paid for services rendered, but rather, are amounts payable on account of a breach of the employment contract.
The effect of these statutory provisions and related case law has been that directors have not generally been found personally liable to former employees for statutory termination pay or severance pay or damages for wrongful dismissal. This may no longer be the case if the ruling in El Ashiri is followed by other Courts.
El Ashiri involved claims by two employees of two separate hotel operations for unpaid wages and damages for wrongful dismissal. The hotel operations were carried on by two separate corporations that had common ownership and a common director. The employees were left with unpaid wages earned and were not paid termination pay upon termination after the hotels ran into financial difficulty. They sued their respective employers as well as the director of those corporations personally. The claim against the director was framed as an oppression remedy claim. By the time the motion was heard, the director was deceased, so the claim was continued as against his estate.
The case was decided on a motion for summary judgment that was not defended. The Court found that the corporate employers were closely held and were controlled by a sole director who used them interchangeably. The Court also found that the director caused the plaintiffs to work for the benefit of the corporations when he knew that the corporations were not in a position to pay for those services and that he failed to disclose the corporations’ financial troubles to the employees, while preferring other creditors over them.
The Court determined that the employees were creditors of the corporations by virtue of the amounts owed to them for wages etc. and, as a result, they were proper claimants under the oppression remedy. The Court further ruled that the director operated the hotels in a manner that was oppressive, high-handed, callous and unfairly prejudicial to rights and interests of the plaintiffs. On the basis of these findings, the Court ruled that the director was personally liable to the employees under the oppression remedy and ordered damages against his estate for all amounts owing on account of unpaid wages, including pay in lieu of notice.
There was no discussion in the ruling about the relevant provisions of the OBCA and ESA for personal liability for unpaid wages or the limitation of the scope for that liability as prescribed by the legislation. Likewise, the Court did not provide any rationale for why it chose to impose liability using the oppression remedy as opposed to using the express provisions under the OBCA or the ESA. In the case of both plaintiffs, however, the damages awarded exceeded the six-month wage limitation prescribed by the relevant legislation, and included damages for pay in lieu of notice that would otherwise not be available under the OBCA and ESA provisions for unpaid wages. It may well be that the Court chose to frame the judgment under the oppression remedy in order to avoid these limitations.
Take Away Points
While this ruling was based upon unique facts that demonstrated a pattern of conduct that was found to be oppressive, it has certainly opened the door for potential exposure for directors to personal liability for wrongful dismissal damages and other amounts in excess of the limitations prescribed by statute. It remains to be seen to what extent Courts will follow the rationale from El Ashiri and use the oppression remedy to expand the scope of personal liability for directors. For the time being, though, directors should be wary of this ruling and take extra care to ensure that they do not cause their respective corporations to engage in conduct that could attract the oppression remedy.
Article written by
Justin Heimpel. Justin is a partner at SorbaraLaw and head of the labour and employment law practice. Justin’s practice is focused primarily on employment and construction matters. Justin was recently selected by his peers for inclusion in The Best Lawyers in Canada® 2015 for Corporate and Commercial Litigation as well as for Employment Law