Court uses oppression remedy to hold directors personally liable for wrongful dismissal damages

In 2015, the plaintiff’s employment was terminated without cause and CEM paid him four weeks’ pay in lieu of notice on the basis that he was a relatively short-term employee of approximately 3½ years; CEM did not include any prior years of service in this calculation.  The plaintiff disagreed, stating that he was effectively an employee throughout and therefore his severance pay should be calculated based on 7½ years of service. He sought 15 months’ pay in lieu of notice.

CEM was struggling in late 2015.  To rebrand itself in the market, it changed its name, to no avail. In 2016, the directors transferred the assets of CEM, ceased operating it, and incorporated 199 Alberta to conduct business.  Many of CEM’s employees were hired by 199 Alberta, which offered the same consulting services as CEM.

The plaintiff made a claim under the oppression sections of the Alberta Business Corporations Act (ABCA) for damages jointly and severally against 199 Alberta and the directors personally.

Decision

Dispute over length of service

The court considered whether the plaintiff’s initial employment was properly terminated in 2009 and questioned the nature of a payment of $7,619 that was made at that time. CEM argued it was severance pay, but the plaintiff argued it was accrued vacation pay.  The court agreed with the plaintiff and concluded that because no severance was paid in 2009, the termination of employment contract was illegal.

Next the court considered whether from April 2009 to September 2011 the plaintiff was an independent contractor, after his employment was not properly terminated.  Because it found certain aspects of his relationship with CEM were that of an independent contractor, while others indicated an employment relationship, the court concluded the plaintiff was a dependent contractor (and misclassified as an independent contractor) and, accordingly, his service was continuous for purposes of CEM’s reasonable notice obligation.  As a result, the court determined that the length of service was 7 ½ years.

Calculation of Reasonable Notice

To calculate reasonable notice, the court considered the list of factors set out in Bardal v Globe & Mail Ltd, 1960 CanLII 294 (ON SC): namely, the character of the employment; length of service; age; and availability of similar employment, bearing in mind the plaintiff’s experience, training and qualifications.  Based on these factors, the court concluded that the plaintiff should have received 10 months’ notice of termination and it deducted the sum the plaintiff was paid on termination plus the income he earned during the 10-month notice period. 

Corporate and Personal Liability

The plaintiff argued that because the defendant directors took the remaining assets out of CEM after his claim was made, he should have judgment against them personally. He argued further that since the directors abandoned CEM after his claim was made only to start up the same or similar company, which was very successful, the plaintiff should be able to obtain relief from 199 Alberta under the ABCA oppression sections because the business of CEM was carried on in a manner that was oppressive or unfairly prejudicial to him or that unfairly disregarded his interests. 

To succeed in his claim, the plaintiff had to establish:

• That he was a “claimant.”  The court noted a claimant includes a creditor who, in the discretion of the court, is a proper person to make an application for an oppression remedy.  Citing precedent, the court stated, “creditors who can show a legitimate interest in the affairs of the company – closer to a shareholder interest in a small company – may satisfy the court that they are a ‘proper person’ to make an application for the oppression remedy.”  In accepting that the plaintiff was a “complainant,” the court emphasized that he was a relatively long service employee of a small company, who its principals knew for 10 years. His claim was the only one outstanding when CEM ceased operating, and it remained outstanding as CEM sold its assets and its principals began making money with a new corporate identity.
• That he had reasonable expectations of the defendants which were not met. The court found the plaintiff “had a reasonable expectation that the corporation’s business and assets would not be unfairly re-structured to benefit management at his expense.”
• That the defendants’ failure to meet those expectations constitutes conduct that was oppressive or unfairly prejudicial or which unfairly disregarded his interests.  Noting the similarity in the services and objectives of CEM and 199 Alberta, the court did not believe there was a reason to incorporate a new company. It concluded that the only thing accomplished by re-starting CEM’s business under 199 Alberta’s identity was to avoid liability for severance.  In the court’s view, the directors treated the plaintiff’s interests as unimportant, and the prejudicial and disregarding effects of the restructuring from CEM to 199 Alberta made it oppressive.  Noting that 199 Alberta took the benefits of CEM’s business (intellectual property, goodwill, management experience) but did not take its obligation to the plaintiff, the court found 199 Alberta liable for the plaintiff’s damages due to his wrongful termination by CEM.

Having determined that oppression occurred, the court then found it was “fit and fair” to hold the directors personally liable.  Citing precedent, the court noted: (i) that to reach this conclusion, the directors must have exercised or failed to exercise their powers in furtherance of the oppressive conduct, and then it must also be “fit in all the circumstances” to impose personal liability for the oppression; and (ii) that when a director exercises power in a manner that is unfairly prejudicial or unfairly disregards the complainant’s interests, liability may lie with the director. 

In finding the named directors jointly and severally liable for the judgment, the court stressed that they:

…were clearly acting in their capacity as the only two directors and shareholders of CEM when they transferred its assets to themselves, ceased operations of CEM, started up the same operations under the same trade name but with a new corporate identity with themselves as directors and majority shareholders again.

199 and the individual directors enjoyed and continue to enjoy the profitability of that new company without regard to the interests of their former employee who had advanced his meritorious claim in a timely way.

…I see no reason why the plaintiff’s judgment for $92,620.01 should not lie against all the named Defendants jointly and severally.

Bottom Line for Employers

CEM International indicates that in certain circumstances, an employee may be able to claim under the oppression remedy that a corporation’s directors are personally liable for the employee’s wrongful dismissal damages.  To avoid this outcome, directors should consider whether the restructuring of their corporation’s business and assets may be unfairly prejudicial to or unfairly disregards the interests of former employees, including for the purpose of avoiding liability for wrongful dismissal damages.