When will the incorporation of a new company be oppressive?

October 27, 2022 | Michael Kirk, Ian Wilson

Introduction

A recent decision of the Alberta Court of King’s Bench, Wisser v CEM International Management Consultants Ltd,[1] involved the Court imposing personal liability against the directors of a corporation for damages for wrongful dismissal pursuant to the oppression remedy provided by the Business Corporations Act, RSA 2000, c B-9 (the “BCA”). The Court held the directors (and their newly formed company) liable for oppression after they transferred the assets of the original corporation, ceased operations, and started a new business under a new corporation to ostensibly avoid a wrongful dismissal claim.

Background

The Plaintiff, James Wisser (“Wisser”) worked briefly for CEM International Management Consultants Ltd. (“CEM”) in 2005. In 2007, CEM hired Wisser as a business coach. The employment contract set out the terms of his employment, but did not refer to the rights of the parties upon termination. In 2009, as a result of insufficient work, Wisser and CEM decided that Wisser should be classified as an independent contractor rather than an employee, and Wisser signed an independent contractor agreement with CEM.

However, in 2011, CEM decided that it wanted Wisser to be an employee again and Wisser signed another employment agreement with the company.

In 2015, Wisser was terminated without cause and provided 4 weeks’ severance in lieu of notice totalling $10,579.59. CEM took the position that this was adequate severance relying on the relatively short term of Wisser’s most recent period as an employee.

Conversely, Wisser argued that he was effectively an employee of CEM throughout and therefore his severance pay should be calculated based on his 7.5 years of service. He sought 15 months’ pay in lieu of notice and punitive damages. Wisser filed a Statement of Claim in May of 2015, shortly after his termination.

By the fall of 2016, CEM, having since rebranded, ceased operations. In its place, the directors incorporated a new, numbered company on September 23, 2016, providing near-identical services to CEM, largely employing the same staff, and receiving assets that had been transferred from CEM. As a result, CEM had no assets and would not have been able to satisfy any judgment against it. The individual defendants in the action were vice presidents, directors, and shareholders of CEM, and directors and shareholders of the numbered company.

Wisser asserted that the incorporation of the numbered company was done to defeat his claim, and included a claim for oppression under the BCA against the new numbered company and the directors personally.[2]

As a result, the Court was required to address two main issues:

  1. Did Wisser receive inadequate severance after he was terminated?
  2. If so, which entities were liable to Wisser for his damages?

Severance is inadequate as Wisser was a Dependent Contractor

In assessing the nature of the relationship between the parties, the Court made a number of determinations:

  • The termination of Wisser’s 2009 employment contract was illegal as CEM had provided no severance to him;
  • From 2009 to 2011, Wisser was a dependent contractor, holding that these “intermediate relationships” have some characteristics of both an employment and an independent contractor relationship;
  • As a result, the length of service was seven and a half years;
  • Wisser was entitled to ten months of reasonable notice or pay in lieu thereof;
  • Wisser had appropriately fulfilled his duty to mitigate his damages; and
  • After deducting amounts previously received, the Court awarded Wisser damages of $92,620.01.[3]

The Defendants’ conduct amounted to oppression under the Business Corporations Act

Having found that Wisser was entitled to additional pay in lieu of notice, the Court then turned to the question of who was liable for such amounts?

In order for Wisser to successfully advance his oppression claim, he was required to satisfy the following requirements:

  1. that he was a “claimant” within section 239 of the BCA and thus eligible to claim relief under the oppression sections of the BCA;
  2. that he had reasonable expectations of the defendants which were not met; and
  3. that the defendants’ failure to meet those expectations constitutes conduct that was oppressive or unfairly prejudicial or which unfairly disregarded his interests.[4]

Although creditors are only considered complainants in limited circumstances, the Court held that Wisser had shown a legitimate interest in the affairs of the company. His interest was closer to that of a shareholder interest in small company. Here, he was an employee with long service and had the only claim against CEM at the time CEM stopped operating.[5]

Likewise, because of the size and the nature of the closely held company, the Court held that Wisser had a reasonable expectation that CEM’s business and assets would not be unfairly re-structured to benefit management at his expense. The defendant directors were well aware of Wisser’s claim when they wound down the company and transferred assets to the new numbered company.[6]

Finally, the Court found that both CEM and the new numbered company were substantially the same entity and the only benefit to starting a new entity was to avoid Wisser’s severance claim.[7] In the Court’s view, this amounted to oppressive conduct which unfairly disregarded Wisser’s interests, and the numbered company was found liable for the damages suffered by Wisser.[8] Likewise, the Court held that it was appropriate to affix joint and several liability against the individual defendants personally, as they sought to enjoy the benefit of starting the new company without regard to Mr. Wisser’s interests.[9]

Takeaways

Defendants to an existing employment, oppression, or other claim may not be able to avoid judgment simply through incorporating a separate entity and removing or transferring assets from the original corporation. Given the broad and flexible jurisdiction granted under the oppression provisions of the BCA, the court may hold directors personally liable if they attempt to avoid corporate obligations in this manner.

Instead, corporations will be better served by having effective protections in place to limit the extent of their liability. In the case of employment relationships, corporations should ensure that they have properly drafted employment or contractor agreements that limit that corporations exposure on the breakdown of the relationship.

Miller Thomson LLP is here to help with all of your business needs. The Commercial Litigation Group at Miller Thomson LLP specializes in commercial arbitration.  If you have questions about the Wisser decision or any other matter, please contact a member of our team.

[1] Wisser v CEM International Management Consultants Ltd, 2022 ABQB 414 (CanLII).

[2] Ibid, at para 2.

[3] Ibid, at paras 14 – 51.

[4] Ibid, at para 63.

[5] Ibid, at paras 65 – 70.

[6] Ibid, at paras 71 – 74.

[7] Ibid, at paras 79 – 80.

[8] Ibid, at paras 89 – 90.

[9] Ibid, at paras 98 – 99.

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