Quebec Court of Appeal Weighs in on Defences Available to Directors in Unpaid Wages Lawsuit

The Quebec Court of Appeal (Court of Appeal) recently addressed the timely and important issue of the scope of the defences available to corporate directors being sued under section 119(2) of the Canada Business Corporations Act (CBCA) in relation to unpaid wages.

In Desgagné c. Commission des normes, de l’équité, de la santé et de la sécurité du travail (available in French only), the Court of Appeal found that a director being sued personally under section 119(2) of the CBCA may raise, in his or her own defence, not only defences available to him or her under the CBCA, but also certain defences available to the corporation, even if such director did not have the interest required to make an application for the revocation of a judgment by default

The judgment rendered against the corporation would not have force of res judicata (a matter that’s been adjudicated and is no longer eligible for appeal) in proceedings between the respondent director and the appellant, but would serve as a presumption of truth that could then be refuted.

BACKGROUND

The appellant was listed as a director of NSF Media inc. (Corporation) for a period of approximately four and a half months, from May 27, 2013 to October 15, 2013.

In January 2017, the Québec Superior Court (Superior Court) rendered a judgment by default against the Corporation and Regroupement indépendant de la musique émergente, ordering them to each pay the Commission des normes, de l’équité, de la santé et de la sécurité du travail (CNESST) amounts owed to a group of employees for unpaid wages in 2013.

The appellant learnt of the judgment in July 2017, following notification of a formal notice by the CNESST requiring that he pay, in his capacity as a director of the Corporation during the period covered by the claims, amounts owed by the Corporation for having failed to pay the amounts so claimed.

In November 2017, CNESST served the original application to the appellant and another director of the Corporation pursuant to section 119 of the CBCA, claiming the payment of an amount of C$97,433.19.

A month later, the appellant made an application for the revocation of the judgment by default rendered in January 2017.

On February 23, 2018, the Superior Court dismissed the application from the bench and determined that the appellant had no right to be called as a defendant or impleaded party in the dispute between the CNESST and the entities involved. In supporting its decision, the Superior Court stated that the judgment rendered does not:

• Directly determine the rights of the appellant as a director; he therefore has no present and actual interest, distinct from that of the Corporation, to make an application for the revocation of the judgment
• Prejudice the rights of the appellant, as the latter may always avail himself of the defences to which he is entitled, including those provided for under the CBCA, and the defence according to which the persons on behalf of whom the CNESST is acting are not employees.

COURT OF APPEAL DECISION

The Court of Appeal confirmed the Superior Court’s decision and determined that the director being sued for the original amounts owed did not have the interest required to make an application for the revocation of the judgment rendered by default against the Corporation, as he was not directly and immediately concerned by such judgment and the claims were considered to be distinct.

However, the Court of Appeal held that the director could henceforth invoke, in his own action, defences that the Corporation could have raised had it defended itself, provided that such defences pertain to the status of “employee of the corporation” and the existence of debts payable to employees for services performed for the corporation while the defendant acted as director.

Therefore, in addition to defences available to him under the CBCA, including the defence of due diligence and the admissibility requirements for this course of action, the director may, in the future, avail himself of additional defences in an action in which liability is sought under the CBCA, provided that the means relied upon are not exclusive to the corporation affected by the judgment rendered and remain relevant to the dispute:

[translation]

“Therefore, this being a separate action (and not an action to execute the judgment rendered against the Corporation), which creates a system outside the scope of ordinary law, the director must be able to assert the defences available to the Corporation, provided however that they pertain to the status of ‘employee of the corporation’ and the existence of ‘debts (…) for services performed for the corporation while [he is] such director (…)’ (subsection 119(1) CBCA). To succeed, the employee (or the organization representing him) must establish above all these two elements; therefore, there is nothing to prevent the Director from challenging the merits of the plaintiff’s claims that such requirements delineating his liability are met. Of course, defences pertaining to the other requirements of admissibility for this course of action may also be asserted.
 

It could even be said that the claimants’ defence pertaining to the status of ‘employee’ and the existence of a debt related to ‘services performed for the corporation’ is a personal defence to the same extent as that of the right to argue non-compliance with the conditions prior to the existence of the directors’ liability. The existence of debts ‘for services [that employees of the corporation] performed for the corporation’ also constitutes an essential condition for the existence of directors’ liability.

 

The director being sued may therefore raise some, but not all, of the defences available to the corporation. As such, he could not raise a set-off defence against, for example, a theft committed by an employee of property belonging to the corporation or harm done to the corporation by defamatory remarks made by an employee following such employee’s departure.”

These being applicable defences, the Court of Appeal readily determined that the judgment against the Corporation did not have force of res judicata against a director being sued in another action as the parties are not the same, which is an essential requirement for the authority of res judicata to be an absolute presumption under article 2848 of the Civil Code of Québec.

In this regard, we note that certain administrative tribunals and Canadian common law provinces may apply the concept of “issue estoppel – res judicata – collateral estoppel”, which provides the adjudicator with greater flexibility by allowing the use of a judgment already rendered to avoid the repetition of evidence.

In the United States, application of the “non-mutual collateral (or issue) estoppel” doctrine may in some cases prevent a court, in a subsequent action, from considering the same facts and issues of an action that has proceeded to judgment, even where the parties are not identical.

In Quebec, the authority of res judicata in a civil action is an absolute presumption that is codified and irrefutable only when there are three identities, namely the identity of action, cause and parties.

In this context, as the Court of Appeal points out in its decision, the operative part and reasons of the judgment against the Corporation constitute legal facts admissible as evidence in the action between the director being sued and the CNESST pursuant to the CBCA, but only as a refutable presumption of truth or accuracy. Such refutable presumption not being absolute, the content of the judgment may be challenged and refuted by the director being sued. Of course, the probative value of such a judgment and the success of the director’s defences will depend on the circumstances in which the judgment was rendered, particularly if the issues raised in the action against the director being sued were the subject of adversarial challenge during proceedings against the corporation. Therefore, according to the Court of Appeal, “[translation] the conclusion of a judgment rendered by default would be easier to set aside than the one at which the decision maker arrived following adversarial challenge.”

It will certainly be interesting to see these principles applied to the judgment on the merits in this dispute, and more so to appreciate their effects in actions against corporations where there is adversarial challenge. Furthermore, these principles are expected to have repercussions in other contexts, such as in employment law, where similar remedies are provided for under section 122.7 of the Act respecting labour relations, vocational training and workforce management in the construction industry and section 251.18 of the Canada Labour Code.

The Court of Appeal’s decision may be challenged before the Supreme Court of Canada, as the deadline for filing an application for leave to appeal has not yet passed.

For further information, please contact:

Natalie Bussière            514-982-4080

or any other member of our Employment & Labour group.