The recent decision of the Alberta Court of Queen's Bench, Wisser v CEM International Management Consultants Ltd., 2022 ABQB 414, determined that the oppression remedy under the Alberta Business Corporations Act ("ABCA"), could extend to imposing liability for wrongful dismissal damages upon directors and their newly formed company. In this case, Mr. Wisser advanced a claim against his former employer, CEM International Management Consultants Ltd. ("CEM") for wrongful dismissal damages in connection with his termination of employment. Following his termination, the directors of CEM ceased corporate operations, transferred the assets of CEM to themselves personally, and began a new corporation, offering nearly identical services to those of CEM while CEM was left judgment proof.
The Court found that the employee was entitled to 10 months' payment in lieu of notice of termination, with damages totaling $92,620.01. However, as CEM was by this point judgment proof, the question quickly turned to who should pay. The Court held that the actions of the CEM directors constituted oppression under the relevant sections of the ABCA. Therefore, in addition to CEM, the directors of CEM and their newly formed corporation were found jointly and severally liable for the wrongful dismissal damages owed to Mr. Wisser.
Mr. Wisser was terminated from CEM in March 2015. He had a written employment contract in place however it was silent regarding his termination rights. At the time of his dismissal, the employee was given 4-weeks' payment in lieu of notice. Mr. Wisser then brought an action, claiming that he did not receive adequate payment in lieu of notice pursuant to the Employment Standards Code and common law.
Prior to resolving Mr. Wisser's claim, the sole directors and shareholders of CEM transferred the assets of CEM to themselves personally, ceased CEM's operations, and allowed it to be struck from the corporate registry. Additionally, within months of ceasing CEM's operations, the directors started a new venture with a new corporate entity performing the same core services as CEM. The former directors of CEM became the sole directors of the newly formed company, and collectively held 95% of its shares.
At the time of CEM's shut down, Mr. Wisser's claim was the only unresolved liability of the company. Believing that this restructuring had been taken solely to defeat his original claim, Mr. Wisser launched another claim under the oppression sections of the ABCA, seeking to recover damages jointly and severally against the CEM directors personally and their newly formed company.
Analysis and Decision
After determining Mr. Wisser's notice entitlement, the Court turned to the employee's oppression claim. The Court applied the well-established test for substantiating an oppression claim:
- The complainant is a proper "complainant" as defined under Section 239 of the ABCA;
- The complainant had reasonable expectations of the defendants, which were not met; and
- The defendant's failure to meet those expectations constitutes conduct that was oppressive or unfairly prejudicial, or which unfairly disregards his interests.
Regarding the first branch of the test, the Court found that Mr. Wisser was a proper "complainant" based on the following factors: he was a long service employee, worked for a small company where he knew the directors well, and his claim was the only outstanding claim at the time CEM was shut down. This confirmed previous decisions of the courts which had held that while creditors are not traditionally proper complainants under the oppression sections of the ABCA, where they can show a legitimate interest in the affairs of the company - similar to the situation of a shareholder of a small company - this may satisfy the Court that they are a proper "complainant".
Next, the Court noted that the employee did have reasonable expectations of CEM and the directors, which were not met. In the face of his claim for payment in lieu of notice of termination, the Court found that it was reasonable for him to expect that CEM's business and assets would not be unfairly restructured to benefit management at his expense.
Turning to the last requirement, the Court found that the conduct of CEM and the directors was oppressive, unfairly prejudicial and disregarded Mr. Wisser's interests. The Court noted that while CEM was indeed experiencing financial difficulty due to external market forces when they ceased operations, by later that same year the market had shifted such that the directors were in a position to start a new, identical, and successful venture. In doing so, they did not formally wind up CEM, which would have required them to account for the employee's outstanding claim, and they instead allowed it to be struck from the corporate registry by simply ceasing to file materials. Importantly, the Court noted that this was not a case where the directors acted in the true best interests of the corporation. There was no reason to incorporate a new entity in order to offer the same core services, using a new methodology and brand name. The only thing truly accomplished by re-starting their venture with a new corporation was to shed liability related to Mr. Wisser's termination.
The Court held that these actions were not done in bad faith; however, Mr. Wisser's interests were treated as being of no importance, and unnecessary and detrimental alterations to CEM's structure were made which gutted its value by moving all intellectual property, goodwill, employees, and management to FPI. While avoiding Mr. Wisser's claim may not have been the primary driver of this restructuring, it is the disregard and prejudicial effects of these acts that qualified them as oppressive.
Having determined that the conduct was oppressive, the Court addressed whether the directors should be personally liable, jointly and severally with each other, CEM and their new business for Mr. Wisser's damages. In its analysis, the Court held that it would be "fit and fair" to attach personal liability to the directors in this case as a result of previous decisions of the Court which had held that directors of small, closely held corporations who exercise their power in the furtherance of oppressive conduct, and which benefits themselves personally, may attract personal liability for that oppressive conduct. Here, the Court made note of the fact that the directors were clearly acting in their capacity as the sole directors of CEM when they ceased CEM's operations, transferred its assets to themselves, and began their new venture. This allowed them to benefit personally as the directors and majority shareholders of the new venture, without regard to the interests of their former employee. For these reasons, the Court held that the two directors were personally liable, jointly and severally with each other and FPI for the $92,620.01 in damages to be paid to the employee for his original claim for payment in lieu of notice of termination.
A few tips.
Employers should take note of this decision, as it re-affirms and highlights several important factors to consider when considering a corporate reorganization through the transfer of assets, or the formation of a new entity. The most salient points highlighted by this decision are the following:
- Employers should be sure to include termination provisions in their employment contracts, which clearly stipulate the rights and obligations of the employer and employee upon termination of the contract.
- When ceasing the operations of a company, employers should be sure to engage in a formal winding up process, wherein they account for any outstanding claims or other liabilities.
- Employees with outstanding claims against their employers can reasonably expect that their employer will not unfairly restructure the business or its assets to benefit management at their expense. When restructuring, employers should be aware that transferring their assets to a new, substantially similar corporation in the face of outstanding claims from employees can constitute oppression and attract liability under the ABCA. Importantly, it is the effects of the actions which are determinative here, not the underlying intentions.
- Where oppression under the ABCA has occurred, but the entity responsible has transferred their assets to a newly formed corporation, operating substantially the same business, with the same directors and management, liability may be imposed against the entity to which the assets were transferred.
Directors and officers of small closely held corporations may also attract personal liability for oppressive conduct. This can occur where their actions or omissions, in their capacity as director or officer, are done in furtherance of oppressive conduct, and such conduct unfairly provides an individual benefit to that director or officer such that it is "fit and fair" to impose personal liability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.