Commercial law: the liability of a company's directors for unpaid wages of the employees

Commercial law. In a recent decision of the Quebec Court of Appeal, Justice Dalphond ruled on the scope of ss. 119 and 145 of the Canadian Business Corporations Act (CBCA), relating to the duties and responsibilities of the directors regarding the wages of their employees, and to the notion of unanimous shareholder agreements, which aim to restrict the powers of the directors. (Allard v. Myhill, 2012 QCCA 2024).

THE FACTS

In 1998, Canadian Inter inc., a bankrupt company, is bought over by three individuals who specialize in the recovery of businesses suffering financially: Robert Myhill, Michael Cochrane and Jay Lilge through ICN Delstar inc., a Canadian Eastern Airlines Ltd. subsidiary. Following this transaction, Inter becomes a franchise company of Canadian Airlines. Although Myhill, Cochrane and Lilge are designated directors of Inter, Delstar, Inter’s single shareholder, signs a unanimous shareholder agreement restricting their powers. The daily management of Inter is nevertheless assumed by Myhill. In 1999, Myhill, Cochrane and Lilge resign as directors of Inter and, at the end of the same year, Inter ceases its operations.

In consequence, Inter’s employees file five claims for unpaid wages, all of which are the subject of a joint hearing before the Court of Quebec. These claims are dismissed by the Court in February 2005. Before the Court of Appeal, the employees now argue the illegality of discharging the directors of their liability for unpaid wages by a unanimous shareholder agreement. They also allege that Myhill, Cochrane and Lilge were, at all times, the de facto directors of Inter and that they should therefore take responsibility for all unpaid wages under s. 119 of CBCA.

THE COURT OF QUEBEC’S DECISION

The Court of Quebec concludes that, as a Canadian Airlines’ subsidiary, Inter depended entirely on Canadian Airlines and, as a result, it was unable to make decisions for itself. The management acts carried out by Myhill were therefore limited to acts of management and leadership accomplished on behalf of Canadian Airlines, the real administrator of Inter. The Court of Quebec also concludes that, given the unanimous shareholder agreement signed by Delstar, the directors had no powers.

THE COURT OF APPEAL’S DECISION

The Court of Appeal first notes that although the directors do have the obligation to act for and in the best interests of the society, they cannot be forced to remain in office if the company is experiencing financial difficulties. The judge also confirms the legality of the unanimous shareholder agreement and of the restrictions to the directors’ powers that it put into place.  

In addition, the Court of Appeal notes that the law defines the director’s liability for unpaid wages as being a personal obligation belonging only to those who exercise an ultimate control on the decisions relating to the operation of the company. Generally, this obligation belongs to the elected directors. Otherwise, it belongs to the persons acting as de facto directors. Through this reasoning, the Court of Appeal reestablishes that given the very nature of the company and notably the fact that it must necessarily act through human action, there exists at least one individual who must ultimately assume the control of the company. Thus, for the purposes of section 119 of the CBCA, a disposition dealing with the directors’ liability for unpaid wages, it can be said that it is the directors who must always take the necessary measures in order to ensure the payment of wages and other debts owed ​​to employees.

The Court emphasizes that it would be absurd to believe that a person, assuming the role of a de facto director, is released from any liability resulting from his failure to implement protective measures for his employees simply because there exists a unanimous shareholder agreement. The very mechanism of the unanimous shareholder agreement is to ensure that the powers and duties, normally belonging to the directors, are instead assumed by the shareholders. However, its content should not and cannot be detrimental to others, notably to the employees of the company in question.  

THE CONCLUSION

Following this reasoning, the Court of Appeal concludes that Myhill, Cochrane and Lilge were de facto directors of Inter who failed to act with the due diligence and the competence that is normally expected from people in such positions. Dubé Légal inc., Montréal commercial law and litigation lawyers.