The directors of two bankrupt Ontario construction companies are on the hook for more than $40,000 after a judge ruled they were personally liable for unpaid wages and benefits.
“I think it’s a groundbreaking decision. I’m not aware of a case where a judge has pierced the corporate veil to make directors personally liable for unpaid wages and benefits,” says Mike McCreary, a labour law specialist with Watson Jacobs McCreary Barristers and Solicitors who led the case against the two Greater Toronto Area companies at the Superior Court of Justice.
McCreary fought the cases on behalf of trust funds for unions including the International Union of Bricklayers and Allied Craftsmen Local 2 and the Drywall Acoustic Lathing and Insulation Local 675.
In the bricklayers’ case, the plaintiffs alleged Vinmod Construction Inc. failed to pay workers their wages for a week in September 2007 and neglected to make payments into a union trust fund that oversees employee health, dental, pension, and training plans.
As a result, the workers went to court seeking an order that Vinmod’s directors, Rino, Robert, Modesta, and Raffaele Fazzini, pay up after the company filed for bankruptcy on Oct. 30, 2007.
In the drywallers’ case, the union was going after Gord Hintze, the director of Drywall Plus Ltd. in Toronto. It owed the benefits fund $13,000 in contributions after it went under, the workers alleged.
Before going to court, McCreary took the bricklayers’ claims to the Ontario Labour Relations Board, which decided Vinmod had violated its collective agreement with the workers and ordered the company to pay up.
He got a similar order for the drywallers through an arbitrator, but McCreary says, the bankruptcy proceedings meant there would likely be little money left over for the workers after secured creditors collected on their debts. “It’s been a difficult issue for trade unions and trust funds to tackle over the years,” says McCreary.
But this time, McCreary remembered a section of the Ontario Business Corporations Act, which takes specific aim at the dilemma by holding a director “personally liable” for wages and vacation obligations when a company has ignored orders to pay up or it has gone bankrupt.
McCreary and other legal experts know of few, if any, other cases where a claimant has used the section, but in these two instances the judges’ rulings were straightforward: the directors were on the hook for the money.
“In my view, this case is clear authority for the plaintiff’s assertion that Mr. Hintze should be found personally liable as a director of the defendant corporation for the subject benefits payments in this case,” Justice Gary Tranmer wrote in his decision in favour of the drywallers.
Anthony VanDuzer, a professor of corporate law at the University of Ottawa, says he knows of no other cases where a director has had to pay up. “I’m certainly not aware of another case in which liability has been attached under that basis,” VanDuzer tells Law Times.
But VanDuzer says the section making directors liable has been controversial, especially for critics who say unpaid wages are more a matter of labour law than of corporate statutes such as the OBCA.
He notes as well that, especially since the section is rarely used, arguments surfaced during discussions over amendments to the Canada Business Corporations Act several years ago that issues of outstanding wages more properly belonged under federal bankruptcy and insolvency legislation instead of corporate laws that vary between jurisdictions.
“There would be a single national standard applicable in bankruptcy,” says VanDuzer, explaining the rationale for the proposal.
Those changes never happened, however, and now McCreary says he hopes the two recent rulings will force corporate directors to be more proactive in ensuring employees receive their wages and benefits.
While unions often do file construction liens in a bid to recover the money, the funds rarely cover the full amount owing. As a result, employees are either out of luck, or the union’s benefits trust fund will cover the shortfall through its own revenues, he notes.
“They should be paying the trust funds before they pay the rent,” McCreary argues, adding he expects other labour groups will now file claims for back wages under the OBCA. “If I was the director of a large construction company and I was one of those appointed directors, and it was a multimillion-dollar business . . . I would be extremely concerned about that,” he says.
Eric Tucker, a professor of labour law at York University in Toronto, says cases such as the bricklayers’ and drywallers’ wage claims represent a “recurring dilemma” in Canada’s legal system.
On one hand, lawmakers design corporate legislation to shield directors from liabilities such as a company’s debts, but at the same time they have a particular interest in protecting employees from being left in the lurch due to a “moral obligation that workers should get paid over anything else.”
In fact, Tucker, whose research has documented the history of shareholder and director liability for unpaid wages in Canada, says corporate legislation passed by Upper Canada in 1851 initially put the obligation on shareholders.
Lawmakers later switched the responsibility to directors, and now the government has strengthened workers’ standing through changes to bankruptcy legislation that created a worker protection fund to cover unpaid wages. Authorities can then move to recover money paid out of the fund from the company, Tucker notes.
For VanDuzer, while having rules to recover unpaid wages is positive, he worries rules such as the OBCA section may create a chill for directors faced with an added liability. In particular, he wonders if the rules may create a “perverse incentive” for directors to bail out of their positions as a company nears bankruptcy.
“One of the concerns which has been raised about this is [that] the risk of paying wages when a corporation is unable to do so is quite a significant exposure for directors.
What sometimes has happened in the past is there have been large-scale resignations of directors when a corporation is on the brink of insolvency,” he says, adding that it’s when a company is going bankrupt that it most needs the guidance of directors to stay afloat.
McCreary, however, says that at least in the two construction cases he litigated, the directors were also “the actual owners of the corporation” and not hands-off advisers appointed to a company board. Tucker, too, argues that while such rulings may cause a chill, they also might make directors more accountable for ensuring workers get their pay or at least be an incentive to get liability insurance.
And, he notes, the consequences are less severe than can sometimes be the case for directors held liable for environmental mishaps or health and safety violations.
“They’re not facing jail time. It’s money,” Tucker says.