Corporate Directors Personally Liable for Wrongful Dismissal Damages

A basic corporate legal principle is that a corporation is an independent legal personality distinct and separate from its shareholders and directors. As a result, shareholders and directors are generally not personally liable for the actions of the corporation. 

There are however, exceptions to this general principle. For example, various statutes, including the Ontario Business Corporations Act (“OBCA”) and Ontario Employment Standards Act, 2000 (“ESA”) state that corporate directors are liable for unpaid “wages”.  Section 81 of the ESA states that directors are jointly and severally liable for all debts not exceeding six months’ wages that become payable while they are directors and for the vacation pay accrued while they are directors for not more than twelve months. “Wages” do not include an employee’s entitlement to termination pay such as that owed to an employee if the employer wrongfully dismisses the employee by failing to provide the employee with reasonable notice of dismissal. Therefore, directors are generally not personally liable for wrongful dismissal damages.

That said, there are circumstances when a dismissed employee may be able to successfully claim wrongful dismissal damages from a corporate director if his or her corporate employer does not have sufficient funds to pay a wrongful dismissal award. The employee would do this by relying upon the oppression remedy. Section 248 of the OBCA provides:

48(1) A complainant . . . may apply to the court for an order under this section.

(2) Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates,

(a) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result;

(b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or

(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,

that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of.

A “complainant”, in addition to being a current or former shareholder, director or officer of the company, is defined in s. 245 of the OBCA to include:

. . . . .

(c) any other person who, in the discretion of the court, is a proper person to make an application under this Part.

For a corporate director to be found personally liable under the oppression remedy for wrongful dismissal damages two criteria must be met. First, there must be specific action or inaction by the director that is directly linked to the conduct said to constitute the oppression. Second, the circumstances of the case must make it “fit” or “appropriate” for the director to personally compensate the former employee.

In Downtown Eatery (1993) Ltd. v. Ontario, 2001 CanLII 8538 (ONCA) the Ontario Court of Appeal allowed a dismissed employee to rely upon the oppression remedy to successfully claim damages against the former directors of his insolvent employer.  The directors of the closely held corporation had used a corporate reorganization to move assets from the employee’s employer to other corporations within the same corporate group.  By doing this the directors attempted to personally benefit themselves by insulating the funds from being able to satisfy the judgment in favour of the dismissed employee.

In allowing the dismissed employee to rely upon the oppression remedy to find the directors personally liable, the Court of Appeal held at paras. 62 and 63:

It was the reasonable expectation of [the employee] that [the directors], in terminating the operations of Best Beaver and leaving it without assets to respond to a possible judgment, should have retained a reserve to meet the very contingency that resulted. In failing to do so, the benefit to [the directors], as the shareholders and sole controlling owners of this small, closely-held company, is clear. By diverting the accumulated profits of Best Beaver to other companies that they owned, they were able to insulate these funds from being available to satisfy [the employee’s] judgment.

For the foregoing reasons, it is our opinion that [the employee] has demonstrated his entitlement to an oppression remedy against [the directors].

The oppression remedy and the common employer doctrine are powerful legal tools available to dismissed employees who may have difficulty collecting judgments from insolvent former employers.