September 25 2001
In a recent decision(1), Ontario's highest court refused to allow the owners and operators of a Toronto nightclub to use a complicated web of related companies to avoid paying damages to a wrongfully dismissed employee. The Ontario Court of Appeal expressly stated that it was not 'piercing the corporate veil' nor otherwise challenging the propriety of the nightclub owners' decision to operate the nightclub through several corporations. Nevertheless, the court cast a wide net in ordering that a judgment against one corporation was enforceable against several of its corporate affiliates and the individuals who owned them. In doing so, the Court of Appeal's decision presents a clear challenge to the ability of businesses to contain and minimize risks to their assets by allocating their operations and associated liabilities among several affiliated corporations.
A wrongful dismissal action was brought by Joseph Alouche, who was dismissed from his position as manager of a Toronto nightclub, For Your Eyes Only. As the Court of Appeal observed, while the nightclub was a simple entity, "beneath the surface of lights, liquor and entertainment, there was a fairly sophisticated group of companies involved in the operation of the nightclub", all of which were owned by two individuals, Messrs Grad and Grosman. The members of the Grad-Grosman Group were as follows:
In his wrongful dismissal action Alouche obtained judgment against the company that issued his paycheques, Best Beaver Management Inc. However, shortly before trial Best Beaver ceased to do business as part of a corporate reorganization of the Grad-Grosman Group and ultimately paid nothing pursuant to the judgment. In attempting to enforce the judgment, two sheriffs raided the For Your Eyes Only premises and seized cash. Downtown Eatery Limited claimed that the cash belonged to it and sued Alouche for its return. Alouche counterclaimed against Grad, Grosman and the corporations in the Grad-Grosman Group for his unsatisfied judgment against Best Beaver. At the trial of this second action, Alouche's counterclaim was dismissed.
In allowing the appeal from the dismissal of Alouche's counterclaim, the court found that all of the companies in the Grad-Grosman Group should be jointly and severally liable for the judgment on the basis of the 'common employer' doctrine. The common employer doctrine is not a matter of piercing the corporate veil to impose one corporation's liability on its affiliates, but rather a matter of examining the employer/employee relationship to determine the intended parties to the employment contract. It requires the court to determine "where effective control over the employee resides", and it may be appropriate to impose liability on the members of a group of related companies where there is "evidence of an intention to create an employer/employee relationship between the individual and the respective corporations within the group".
In finding all members of the Grad-Grosman Group liable the court stated that, while there was nothing wrong with operating the nightclub through a complex group of companies, "the law should be vigilant to ensure that permissible complexity in corporate arrangements does not work an injustice in the realm of employment law". The court noted that Alouche's contract was with For Your Eyes Only, which was the name of the nightclub but not itself a corporate entity. In addition, the employment contract specified that Alouche's health and insurance benefits were to be provided by the so-called 'sister organization' of For Your Eyes Only. Based on these factors and the structure of the Grad-Grosman Group, the court found that Alouche's true employers were all of the members of the Grad-Grosman Group which worked as a single, integrated unit in the operation of For Your Eyes Only.
The owners of Best Beaver, Grad and Grosman, were also found to be personally liable to pay the wrongful dismissal judgment. Again, the court did not pierce the corporate veil in determining that they should be liable for the unpaid judgment against Best Beaver. Instead, the court found them liable under the oppression remedy provisions in Section 248 of the Ontario Business Corporations Act. The oppression remedy allows complainants (defined to include shareholders, creditors and any other "proper person to make an application") to access a broad range of remedies to rectify actions of a corporation which are "oppressive or unfairly prejudicial to, or unfairly disregard the interests of, any security holder; creditor, director or officer of the corporation". In the case of Grad and Grosman, the conduct complained of was their corporate reorganization of the Grad-Grosman Group which resulted in Best Beaver ceasing operations shortly before trial and being left with no assets to satisfy a potential judgment against it.
The court found that Alouche, with a pending trial which would likely result in a damages award against Best Beaver, was a 'proper person' to seek an oppression remedy regarding the cessation of operations. In determining whether it was oppressive to shut down Best Beaver, the court found that it did not matter that the corporate reorganization was done without any intention to harm its former employee. If Alouche could establish that he had a reasonable expectation that the affairs of the corporation would be conducted with a view to protecting his interests and that the reorganization caused him harm, the oppression remedy was available. In this case it was found to be oppressive for Grad and Grosman to cause Best Beaver, a profitable company with cash available to satisfy any claims arising from employment contracts, to cease operating and to leave it without assets to pay a possible judgment on a pending trial. Accordingly, Alouche was awarded an oppression remedy against Grad and Grosman which allowed him to enforce his wrongful dismissal judgment against them personally.
It is significant that the Court of Appeal imposed an oppression remedy against Grad and Grosman for causing Best Beaver to cease operations while not providing for a possible future liability such as a judgment in favour of Alouche. Arguably, this extends the reach of the corporate oppression remedy far beyond its usual availability to existing creditors who are harmed by acts of corporation, and requires corporate directors and officers to examine whether there are any contingent creditors who might be oppressed by the decisions they make.
The Court of Appeal's decision highlights the importance for businesses, if they decide to allocate their operations and business relationships among several corporations, to ensure that they keep those operations properly separated. While the court aimed its decision at protecting employees from the "complexity of modern corporate structures", it has potential relevance to contractual relationships beyond the employment context. This decision essentially involved the court implying terms in a contract in which the employer was not clearly identified. The court remedied this ambiguity by rendering several corporations liable under the contract instead of just one. The members of the Grad-Grosman Group might have avoided liability if Alouche's employment contract had more clearly provided for Best Beaver to be his employer and for all of Alouche's salary and benefits to come from Best Beaver.
In light of this decision it will be important for affiliated corporations to examine their employment and other contractual relationships to ensure that the liabilities arising from them are not at risk of being attributed to other members of their group. If it is unclear who the parties to such contracts are, and the contractual obligations or benefits are shared by more than one member of a group of companies, it is possible for the liabilities that arise to be allocated to several corporations, as happened in this case.
Further, the decision should serve as a warning to corporate owners, directors and officers who, for whatever reason, cause a corporation to cease operating without providing adequately for possible future liabilities. The court found the principals of Best Beaver personally liable for shutting it down and leaving it without assets in the face of a possible judgment on an upcoming trial. This decision sends a message that owners, officers and directors can be held to account if they authorize an otherwise legitimate corporate reorganization which has the effect of placing a corporation's assets outside the reach of its existing and contingent creditors.
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