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How a director of a failed company can still be on the hook for employees’ pay after resigning


April 22, 2013   by Greg Meckbach, Associate Editor


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A recent court decision means that directors of corporations regulated by the federal government could, in some cases, be held liable for unpaid wages even if they delivered a resignation letter, a blog post from law firm Heenan Blaikie LLP suggests.

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“Directors of a corporation cannot generally avoid liability for wages and other amounts for which they may be held personally liable under the code simply by resigning,” according to the blog post on the Lexology website, written by Heenan Blaikie lawyers Christopher Diamond and Shane Todd and published Wednesday.

“That said, timely and effective resignations are key, because directors are generally liable for unpaid wages and other compensation that became payable while they were directors,” they wrote. 

Diamond and Todd were commenting on a federal court decision last February against Jeffrey Miller, who became a director of commercial airline Corpac Canada Ltd. in 2007. Corpac shut down operations in June, 2009, according to court records.

Airlines are regulated by the federal government and the Canada Labour Code states that where a federal inspector finds that an employer has not paid wages or other required payments to employees, the inspector can issue a written payment order to the employer.

But where recovery of wages from the corporation is impossible or unlikely, section 251.18 of the Canada Labour Code states that directors are “jointly and severally liable for wages and other amounts to which an employee is entitled … to a maximum amount equivalent to six months’ wages … to the extent that the entitlement arose during the particular director’s incumbency.”

As such, one of the most significant exposures for directors under federal labour law is for statutory termination pay, Diamond and Todd wrote.

“Liability for this arises from employees’ termination, which in these cases is often the result of a bankruptcy,” they wrote. “As such, a timely and effective resignation that takes place before the employee terminations, whether by bankruptcy or otherwise, can help a director avoid liability for statutory termination pay.”

According to court records, Miller claimed he had delivered a resignation letter to Corpac’s office in December, 2008. At the time, he was the only director.

“Between February and June 2009, Corpac terminated the employment of several employees,” according to background information provided in a decision Feb. 3, 2013 by Mr. Justice Richard Boivin of the Federal Court.

Human Resources and Skills Development Canada (HRSDC) had received 26 complaints from former employees or Corpac alleging they had not been paid wages, overtime, per diems, vacation pay, pay in lieu of termination, and severance pay.  An HRSDC inspector was assigned to the case.

Court records indicated Miller had not filed his resignation with the Alberta Corporate Registration System and a search by HRSDC indicated Miller was still a director. So in January, 2011, an HRSDC inspector sent Miller a letter stating that $397,784.56 was owed to former employees and that a payment order could be issued.

A payment order was eventually served to Miller on May 29, 2011. Although persons receiving such orders have an option to appeal those orders to the Minister of Labour and to have their appeal heard by a referee, Miller’s lawyer did not receive the payment order until June 10, by regular mail. So through his lawyer, Miller asked for an extension of the 15-day appeal period. But HRDSC staff told Miller’s lawyer “there was no provision in the Labour Code for extending the appeal period.”

Miller “does not directly dispute the adequacy of the appeal process; rather, he suggests that because the appeal period lapsed, and therefore this remedy is no longer available to him, he is entitled to seek judicial review,” Judge Boivin noted.

The federal court decision “serves as a stark reminder that the payment order appeal process set out in the (Canada Labour Code) should not be taken lightly,” Diamond and Todd wrote on their blog post.

Ultimately, Judge Boivin ruled against Miller on the grounds that Miller’s contention — that the HRSDC inspector wrongly concluded he was a Corpac director at the time the employees were let go —  “could have been adequately addressed by a referee on appeal.”

HRSDC, Judge Boivin added, was only obliged to send the payment order to Miller and not to his lawyer.

In light of this decision, Diamond and Todd suggested in their post April 17 that it is important that directors retain copies of the original, executive resignation letters, and proof of delivery and receipt, to establish the timing and effectiveness of the resignations.

In the Miller case, Judge Boivin noted that HRSDC argued the only evidence Miller provided of his resignation was a copy of a letter he had delivered and addressed to Roger Cross, at the time executive vice president and general manager of Corpac. Miller stated he had left the letter on the desk of a different Corpac executive, who later called to confirm receipt.

But Cross, to whom the letter was actually addressed, “denied in writing having ever received the letter,” according to the Federal Court. “Since (Miller) bore the burden of proving he had resigned, the (federal department of labour) argues that the Inspector was reasonable to conclude that the (Miller) was a Director at the time the entitlements arose.”

In their post on the Heenan Blaikie blog, Diamond and Todd noted it is important to ensure that the “technical requirements for a resignation in the applicable business corporation legislation are met.”

Directors should also “avoid making or participating in decisions, signing correspondence, or otherwise holding themselves out in a fashion that could lead a court to find that, notwithstanding their resignation, they continued to act as de facto directors,” they wrote.