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September 22, 2008

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Law times • SEPTEMBER 22, 2008 NEWS 'Groundbreaking' decision pierces corporate veil the hook for more than $40,000 after a judge ruled they were per- sonally liable for unpaid wages and benefits. "I think it's a groundbreak- ing decision. I'm not aware of a case where a judge has pierced the corporate veil to make direc- tors personally liable for unpaid wages and benefits," says Mike McCreary, a labour law special- ist 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 Interna- tional Union of Bricklayers and Allied Craftsmen Local 2 and the Drywall Acoustic Lathing and Insulation Local 675. In the bricklayers' case, the plain- tiffs alleged Vinmod Construc- tion Inc. failed to pay workers their wages for a week in Sep- tember 2007 and neglected to make payments into a union trust fund that oversees em- ployee health, dental, pension, and training plans. As a result, the workers went to court seek- ing an order that Vinmod's directors, Rino, Robert, Mod- esta, 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, Mc- Creary took the bricklayers' claims to the Ontario Labour Relations Board, which decided Vinmod had violated its collec- tive agreement with the work- ers and ordered the company to pay up. He got a similar or- der for the drywallers through an arbitrator, but McCreary says, the bankruptcy proceed- ings 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 re- membered a section of the Ontario Business Corporations Act, which takes specific aim at the dilemma by holding a director "person- ally 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 as- sertion that Mr. Hintze should be found personally liable as a director of the defendant cor- poration for the subject benefits payments in this case," Justice Gary Tranmer wrote in his deci- Directors on hook for unpaid wages and benefits T BY GLENN KAUTH Law Times he directors of two bank- rupt Ontario construc- tion companies are on 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 re- Mike McCreary says he hopes two recent rulings will force corporate directors to be more proactive in ensuring employees receive their wages and benefits. sion in favour of the drywallers. Anthony VanDuzer, a pro- fessor 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," Van- Duzer tells Law Times. But VanDuzer says the sec- tion 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, es- pecially since the section is rarely used, arguments surfaced during discussions over amendments to the Canada Business Corpora- tions Act several years ago that issues of outstanding wages more properly belonged under federal bankruptcy and insolvency leg- islation instead of corporate laws that vary between jurisdictions. "There would be a single na- tional standard applicable in bank- ruptcy," says VanDuzer, explaining the rationale for the proposal. Those changes never hap- pened, however, and now Mc- Creary says he hopes the two re- cent rulings will force corporate directors to be more proactive in ensuring employees receive their wages and benefits. While unions often do file construc- tion 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 construc- tion company and I was one of those appointed directors, and it was a multimillion-dollar busi- ness . . . 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 "recur- ring dilemma" in Canada's legal system. On one hand, lawmak- ers design corporate legislation to shield directors from liabili- ties such as a company's debts, but at the same time they have a www.lawtimesnews.com search has documented the history of shareholder and di- rector liability for unpaid wag- es in Canada, says corporate legislation passed by Upper Canada in 1851 initially put the obligation on sharehold- ers. Lawmakers later switched the responsibility to directors, and now the government has strengthened workers' standing through changes to bankruptcy legislation that created a work- er 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 di- rectors to stay afloat. McCreary, however, says that at least in the two con- struction cases he litigated, the directors were also "the actual owners of the corporation" and not hands-off advisers ap- pointed to a company board. Tucker, too, argues that while such rulings may cause a chill, they also might make directors more accountable for ensuring Dodge goes to Bennett Jones BY GLENN KAUTH Law Times D avid Dodge is making a career change. After ending his stint as governor of the Bank of Canada earlier this year, Dodge is joining business law firm Bennett Jones LLP as a senior adviser based in Ottawa. For Bennett Jones chairman and chief executive officer Hugh MacKinnon, the latest financial turmoil on Wall Street makes Dodge's appointment to the firm a timely one. "In David Dodge's case, who knows more about finance?" says MacKinnon. In particular, MacKinnon believes Dodge will likely be a use- ful resource for businesses navigating the troubles caused by the collapse of investment banking firm Lehman Brothers and the fire sale of Merrill Lynch & Co. Inc. The crisis already has U.S. politicians talking about beefing up regulations on the investment bank sector, something MacK- innon argues Dodge, with his seven-year history as the head of Canada's central bank along with his long career in the federal public service, will be well placed to advise the firm's clients, which include financial institutions as well as investment firms. "He'll have an understanding of what the regulators are going to do to help keep this [crisis] from happening [again]," MacKin- non tells Law Times. "A guy like Dodge will know as much about what is likely to happen as anyone." Dodge isn't the first high profile public official to join Bennett Jones. The ranks of senior advisers include people such as former Alberta premier Peter Lougheed, retired Supreme Court justice Jack Major, and ex-deputy prime minister Anne McLellan. For MacKinnon, recruiting public figures is part of a strategy to boost the firm's ability to advise clients on what's coming next. One of them, for example, former Canadian ambassador to the United States Allan Gotlieb, was able to foresee the U.S. government's moves to distance itself from Canada's oil sands sector. LT 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 en- vironmental mishaps or health and safety violations. "They're not facing jail time. It's money," Tucker says. LT PAGE 5 September Specials Canadian Commercial Reorganization: Preventing Bankruptcy Richard H. McLaren Conflicts of Interest: Principles for the Legal Profession M. Deborah MacNair Damage Control: An Employer's Guide to Just Cause Termination, Second Edition Malcolm J. MacKillop, James G. Knight and Kerry Williams Understanding Accounting: The Lawyers' Guide Lawrence S. Rosen, Frank M. Vettese and Jim Muccilli 9/17/08 9:42:07 AM

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