Legal Blog

Fair Oppression

The oppression remedies under the Business Corporations Act are encompassing more and more situations. Once the courts decided that the section could be applied to protect creditors, the floodgates were opened. Judgment creditors were the first to be protected; judgment creditors-to-be soon followed. Downtown Eatery (1993) Ltd. v. Ontario, an unreported 2001 decision of the Ontario Court of Appeal, deals with the concept of bad faith in the context of oppression.

Action

Mr. X owned two night clubs: strip A and strip B. Mr. X offered employee a job as the manager of strip A. Employee entered into a written employment agreement with strip A, an agreement that referred to strip A by its business name; its correct corporate name was not used. The written employment agreement noted that employee would receive the employee benefits available “in our sister organization.”

Employee started to work and received his paycheques from C Limited. Six months later employee was dismissed. He sued for wrongful dismissal against C Limited because it had issued his cheques.

Before the trial, a major reorganization occurred in Mr. X’s corporations. Upon learning this, employee moved to join Mr. X in his action. Unfortunately, the action had already dragged on for three years and, faced with another adjournment to allow Mr. X to retain counsel, employee withdrew his motion. Consequently, the action went to trial against C Limited only.

C Limited dismissed its lawyer and Mr. X defended it at trial. Employee was successful at trial and obtained judgment for approximately $83,000 all in.

Collection

C Limited did not pay. Accordingly, the sheriff, on employee’s direction, attended at the premises of strip A and seized cash of $1,800. D Limited, another corporation owned by Mr. X, commenced an action against the sheriff and employee for the return of the money. It claimed that it was the owner of strip A. Employee counterclaimed against D Limited, Mr. X, and all eight corporations owned by him.

The trial judge held in favour of D Limited and dismissed the counterclaim of employee. He found that the reorganization of Mr. X’s corporations was not carried out for fraudulent purposes or even to deprive employee of a recovery of his potential judgment against C Limited; the corporations were reorganised for legitimate business reasons.

Appeal Issues

Employee put forward two grounds for liability:

1.   All of Mr. X’s corporations and Mr. X himself were common employers of employee and all were equally liable to him for his wrongful dismissal; and

2.   Oppression under the Business Corporations Act.

Common Employer

The law has recognised that a common employer can employ employees within an established complex and seamless corporate structure. The Court of Appeal noted that: “The definition of employer in this simple and common scenario should be one that recognizes the complexity of modern corporate structures, but does not permit that complexity to defeat the legitimate entitlements of wrongfully dismissed employees. The trial judge focused on the absence of a contract between Alouche and any of the potential common employers. We think that this focus is too narrow. A contract is one factor to consider in the employer-employee relationship. However, it cannot be determinative; if it were, it would be too easy for employers to evade their obligations to dismissed employees by imposing employment contracts with shell companies with no assets.”

The Court held that all the corporate defendants were liable to employee based on the common employer doctrine. However, since employee had attempted to join Mr. X in his original action and then withdrew his motion, the Court held that Mr. X was not liable to be included as a common employer. That portion of the claim was res judicata.

Oppression

The Court summed up the test as follows: “The trial judge failed to understand that the oppressive conduct that causes harm to a complainant need not be undertaken with the intention of harming the complainant. Provided that it is established that a complainant has a reasonable expectation that a company’s affairs will be conducted with a view to protecting his interests, the conduct complained of need not be undertaken with the intention of harming the plaintiff. If the effect results in harm to the complainant, recovery under section 248 (2) may follow.”

In this case, the Court noted that when C Limited went out of business, it was profitable and its accumulated profits were sufficient to pay the judgment debt. Since, by diverting the assets of C Limited to other companies, Mr. X insulated those assets from employee’s subsequent judgment, Mr. X was personally liable for the oppression.

Facts

In this type of action, like almost all other actions, the facts are crucial. Prove that the directors of a corporation allowed the corporation’s assets to be used by a related corporation without appropriate compensation and the directors are yours. The flipside is that it is very difficult for directors of a corporation with debts to reorganise its assets into a new corporation without accounting for the debts of the old corporation.