Date: 20011010
Docket: 96-3504-GST-G
BETWEEN:
DAVID WILLIAM MOSIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Bowman, A.C.J.
[1]
This appeal is from an assessment made under section 323 of
the Excise Tax Act against the appellant as a director of
T.R.S. Food Service Limited ("TRS").
Subsection 323(1) of that Act imposes a liability on
a director of a corporation for the amounts of net Goods and
Services Tax that the corporation has failed to remit.
[2]
Subsection 323(3) provides to a director a defence of due
diligence, and it reads
A director of a corporation is not liable for a failure under
subsection (1) where the director exercised the degree of care,
diligence and skill to prevent the failure that a reasonably
prudent person would have exercised in comparable
circumstances.
[3]
The appellant was called upon by the three directors of TRS to
take over the operation of the company which had fallen into
serious financial difficulties. From August 1, 1992 to
April 30, 1993 there was a shortfall in the amount of GST
paid by TRS. The appellant was assessed as a director during that
period in the amount of $594,715.16. The respondent now concedes
that even if the appellant is liable under section 323 this
amount should be reduced by $59,120.79, plus interest and
penalties referable to that amount.
[4]
The appeal raises a number of issues, as follows.
1.
Does section 323 impose a liability on de facto
directors, as opposed to de jure directors?
2.
Was the appellant a de facto director in the period in
question? It is conceded that he was not a de jure
director.
3.
If he was a de facto director did he meet the due
diligence test in subsection 323(3)?
4.
In any event, if the appellant was a director was the assessment
(which was made on September 18, 1995) made not more than
two years after the appellant last ceased to be a director?
[5]
For reasons that I shall develop more fully below I have
concluded that
(a)
Section 323 does indeed catch de facto directors.
(b)
The appellant was not a de facto director of TRS at any
time.
(c)
In any event, he met the due diligence test in
subsection 323(3).
(d)
Even if his activities with TRS made him a director, they ceased
more than two years before September 18, 1995.
[6]
The facts are rather complex and in some instances contradictory.
Numerous documents were put in evidence, and five witnesses
testified. A lengthy recitation of the facts is not required. It
is sufficient to summarize the salient points.
[7]
TRS (which is now bankrupt) started operations in 1956. Its
business was the provision of food services through vending
machines, mobile food vending trucks, and cafeterias. It was
successful and by 1990 it had 600 employees and sales of
about $24,000,000 from its operation in Ontario and Quebec. Its
biggest customer was General Motors of Canada to which it
supplied cafeteria services at its various plants in Ontario and
Quebec.
[8]
TRS was a wholly owned subsidiary of Esposito Holdings Limited[1] ("EHL").
EHL was owned by the three Esposito brothers. Sam (now deceased),
Tony and Rocco.
[9]
The appellant began working for TRS in 1973 and he advanced
through the company in sales and public relations until he became
Vice-President, Food Services on October 8, 1991, a position
from which he resigned in January 1992. He had no formal
education and was not involved with finances.
[10] By early
1992 TRS was in serious financial difficulties whether through
mismanagement or through the substantial and unexplained
disappearances of cash. In March of 1992 a group of eight
employees ("the group of eight") offered to purchase
the shares of TRS and EHL. The appellant was never part of this
group. The group was led by Larry Fowler, the Executive
Vice-President and Chief Executive Officer, and James Grady, the
Vice-President, Finance. The evidence was that the group of eight
effectively managed TRS. In April 1992 the appellant was fired.
On May 29, 1992, James Grady and Larry Fowler "in
trust" (which I presume means in trust for the group of
eight) signed an offer to buy from the Espositos the shares of
TRS and EHL, conditional upon a plan of arrangement under the
Companies' Creditors Arrangement Act
("CCAA") being approved. On June 9, 1992
Justice Rosenberg of the Ontario Court declared TRS to be subject
to the CCAA and directed it to file a plan of arrangement.
It did so on June l6, 1992.
[11] In July
1992 one of EHL's creditors attempted unsuccessfully to
petition it into bankruptcy.
[12] The group
of eight withdrew their offer to buy the shares of TRS some time
in July, following which the Espositos invited the appellant to
come back to TRS and manage it in an attempt to salvage its
operation. The appellant agreed. He did not trust the audited
financial statements and since he had no experience in financial
matters he retained the services of a lawyer, Alek Bolotenko, an
accountant, Michael Laing, and a management consultant,
Mr. Simmons.
[13] On
July 15, 1992 the three directors and controlling
shareholders (through EHL) signed a resolution making the
appellant President and Chief Executive Officer and defining his
duties. The document is important in that it sets out the legal
basis for the appellant's supervision of TRS and presumably
the basis upon which the respondent contends that the appellant
was a de facto director. It reads:
DIRECTORS' RESOLUTION
OF
T.R.S. FOOD SERVICE LIMITED
WE, the undersigned, being all of the directors of T.R.S. FOOD
SERVICE LIMITED (hereinafter referred to as the
"Corporation"), do hereby consent to the following
resolutions of the Corporation as evidenced by all of our
signatures hereafter in accordance with The Business Corporations
Act, Ontario, this 15th day of July, 1992.
BY-LAW TO CHANGE BY-LAW NO. 1
THEREFORE BE IT RESOLVED:
1.
THAT pursuant to paragraph 4 of By-Law No. 1 of the by-laws of
the Corporation, the directors hereby determine that, as the
President and Chief Executive Officer of the Corporation, DAVID
MOSIER shall have and is hereby authorized to have general
supervision and authority over the direction of all the business
and affairs of the Corporation except such matters and duties as
by law must be transacted or performed only by the Board of
Directors or by the shareholders in general meeting but subject
always to the general or specific instructions of the Board of
Directors.
2.
Without restricting the generality of the foregoing, the
President and Chief Executive Officer of the Corporation is
hereby empowered to make and enter into all contracts,
engagements or commitments on behalf of the Corporation, to
employ and discharge all agents and employees of the Corporation,
to purchase or otherwise acquire and to sell, transfer, convey or
otherwise dispose of on behalf of the Corporation, (to borrow
money and negotiate loans on behalf of the Corporation and to
execute and deliver on behalf of the Corporation mortgages,
charges, hypothecs and other encumbrances of or in respect of all
or any of the real or personal property of the Corporation to
secure any moneys borrowed by the Corporation), to execute and
deliver in the name of and on behalf of the Corporation any and
all contracts, agreements, deeds, conveyances, transfers, (bonds,
debentures, promissory notes and other securities and
obligations) and to affix the seal of the Corporation thereto
whenever necessary.
AND WE have all signed.
(signed)
ANTHONY N. ESPOSITO
(signed)
SAMUEL ESPOSITO
(signed)
ROCCO V. ESPOSITO
[14] The
appellant's first step was to fire most of the group of
eight, including James Grady. He did so in the presence of Rocco
and Sam Esposito and, I believe, Tony. He tried to fire Larry
Fowler but Sam prevented him from doing so. He did however
succeed in assigning him no duties, and he left after a
while.
[15] The
appellant immediately set out to attempt to revive TRS'
failing fortunes. He met with the Royal Bank, to whom TRS and EHL
owed large amounts of money. He met with suppliers in an
unsuccessful attempt to have them restore the credit terms to
15-30 days. After the bank called its loan the suppliers insisted
on cash on delivery. He had Mr. Laing do an audit of the
books of TRS and found that the indebtedness of TRS was at least
double of that in the most recent financial statements. He
ascertained that a substantial number of creditors had not been
informed of the CCAA application. He met with the
officials of Revenue Canada and worked out a payment plan for the
arrears of GST owed. Revenue Canada agreed to $2,400 per week and
this arrangement was honoured.
[16] Quite
apart from his problems with the suppliers, who insisted on
supplying only on a c.o.d. basis, he had to contend with the
bank, which controlled all cheques that were issued and decided
which ones would be honoured and which ones would not. Since
TRS' business was carried on substantially in cash the bank
kept an employee at the premises of TRS when cash was delivered
and it would count and simply take the cash.
[17] The
appellant recognized ultimately that the situation was hopeless
and urged the bank to put TRS into bankruptcy. It refused
presumably because it, of all the creditors, was getting paid and
it had no incentive to put the company into bankruptcy. The
appellant urged the directors to put the company into bankruptcy
but they refused to do so unless they could be released from
their personal guarantees to the bank.
[18] Finally
the appellant told the directors in late April or early May of
1993 that he quit and he threw the keys on the table and walked
out. This somewhat dramatic gesture was corroborated by Rocco
Esposito and I accept that it happened as the appellant said.
[19] On
July 22, 1993 the appellant gave TRS and the directors
written notice of his resignation, as follows.
RESIGNATION
TO:
T.R.S. FOOD SERVICE LIMITED
AND
TO:
The Directors thereof
I, DAVID MOSIER, the undersigned hereby tender my resignation as
President of the above Corporation, to take effect
immediately.
DATED the 22nd day of July, 1993.
(signed)
DAVID MOSIER
[20] A further
fact should be noted. Mr. Mosier was prepared to buy
TRS' assets but would do so only if TRS went bankrupt.
Finally it did. On June 22, 1993 at a meeting of the three
directors, Sam, Rocco and Tony Esposito, it was resolved that TRS
make a voluntary assignment into bankruptcy. The formal
assignment took place on September 15, 1993 and the
Certificate of Appointment under section 49 of the
Bankruptcy and Insolvency Act was filed in court on
September 20, 1993. Subsequently the trustee sold the assets
of TRS to a company owned by Mr. Mosier.
[21] The
foregoing rather sterile summary of the facts is sufficient for
me to dispose of the case, although it does not really capture
the full flavour of the dramatic events that were described in
the viva voce evidence.
[22] I revert
then to the series of questions that posed at the beginning of
these reasons.
[23]
1.
Does section 323 of the Excise Tax Act catch de
facto directors? I think it does under some circumstances,
but one must be very careful about what one means by the
expression "de facto director". In Dirienzo
v. The Queen, 2000 DTC 2230, I stated in what was
obviously an obiter dictum that in the circumstances of
that case the sole shareholder of a company who installed his
nephew as a puppet director and nominee was the de facto
director. That was an extreme case and I relied upon The Queen
v. Corsano et al., 99 DTC 5658, which held that an
ostensibly legally appointed director could not rely upon
technical defects in his appointment to escape liability under
section 227.1 of the Income Tax Act. There is a
difference between the two cases. As the Chancery Division stated
in Re Lo-Line Electric Motors Ltd, [1988]
2 All ER 692, de facto directors can be
those who are ostensibly duly elected but who may lack some
qualification under the relevant company law, and those who
simply assume the role of director without any pretence of legal
qualification.
[24] The court
said in that case, at pages 699-700:
Counsel for Mr Browning sought to draw a distinction between
two types of de facto director, viz (a) a person who has been
appointed director, but invalidly, and (b) a person who has never
been appointed director at all. He submitted that, if, contrary
to his primary submission, s 300 permitted regard to be paid to
the conduct of a director who was invalidly appointed, the
section did not extend to the conduct of a person who had never
been appointed a director at all. He relied Morris v
Kanssen [1946] 1 All ER 586 at 590, [1946] AC 459 at 471
in which the House of Lords drew exactly that distinction in
holding that the statutory predecessor of s 285 of the 1985 Act
(validity of acts of directors) did not validate the acts of a
person who had never been appointed a director at all. I do not
accept this submission. For the reasons I have given the plain
intention of Parliament in s 300 was to have regard to the
conduct of a person acting as a director whether validly
appointed, invalidly appointed or just assuming to act as
director without any appointment at all. In this context, there
is no logic in drawing the distinction put forward by counsel for
Mr Browning. Morris v Kanssen was dealing with quite a
different section which validated the acts of a director
'notwithstanding any defect that may afterwards be discovered
in his appointment or qualification'. In that case, both the
words of the section and the common sense of the matter pointed
to the section being concerned only with the acts of a person who
had been invalidly appointed a director.
In my judgment therefore, under s 300 the court must have regard
to the conduct of the respondent as director whether validly
appointed or invalidly appointed or merely de facto acting as a
director.
[25] This case
was cited with approval by Rip J. in Paton v. Canada,
[1990] T.C.J. No. 765.
[26] The
English legislation is of course different from ours but I cite
the Lo-Line case simply to illustrate that de facto
director is a concept that is well recognized in law, depending
on the circumstances. It should however be applied with caution,
particularly where it imposes a liability.
[27]
2.
Was the appellant a de facto director? He was not elected
as a director, he held no shares of TRS and he never held himself
out as a director. Indeed the directors, the Esposito brothers,
never represented to anyone that he was a director. He was
subject to the legal control of the duly elected directors, Tony,
Sam and Rocco Esposito. I do not accept that they ever abdicated
their position as directors. They did the sort of thing directors
are expected to do — they appointed senior management such
as the appellant, and they passed a resolution to put the company
into bankruptcy. These are acts of directors in which the
appellant did not participate. Indeed he could not have
participated or even purported to participate in these purely
directorial acts. One can conceive of a situation where the
controlling shareholder of a corporation makes all the corporate
decisions and installs puppets as directors. Such a person was
the uncle in Dirienzo and he would have had great
difficulty in resisting liability as a director.
[28] That is
not the situation here. The directors appointed the appellant as
a senior officer and gave him extensive powers and
responsibilities. This did not make him a director, de
facto or de jure. In large public corporations
extensive powers are conferred on senior officers by directors at
semi-annual meetings. Such persons have the power and
responsibility of running the day-to-day operations of the
corporation but they do not thereby become directors.
[29] There is
a lengthy and learned discussion of de facto directors at
pages 408 to 411 in Mr. Wegenast's leading text on
corporate law Canadian Companies. I cite only a short
passage from page 411 which is, I think, useful in this case
(footnotes omitted):
There must, however, have been something more than a mere
usurpation of office. There must have been something to justify
outsiders in assuming that the person or persons in question had
been duly elected or were acting with the concurrence of the
shareholders, for the doctrine of de facto directors is
merely an application of the doctrine of estoppel or
"holding out."
The objection to de facto directors cannot, of course, be
invoked by an unauthorized director himself, as for example to
escape liability for payment of dividends out of capital, or for
other misfeasance, or to escape a statutory liability for wages
of workmen, or for failure to make government returns, or, it
would seem, to claim remuneration or indemnity; for a de
facto director is in the same position as an executor de
son tort, being subject to all the burdens of his office
without any of its benefits. And he cannot himself set up the
invalidity of his election by way of objection to the making of a
call or the declaration of a forfeiture in which he is
interested.
[30] I am
inclined to think that the concept of de facto director
may have evolved in some degree since Mr. Wegenast wrote the
above in 1931. However one wishes to define de facto
director — either as one who occupies, whether by
usurpation or default, the role of director or one in whose
election there is some defect — it is clear that
Mr. Mosier was not one of those.
[31]
3.
If the appellant was a de facto director did he meet the
due diligence test in subsection 323(3)? Even if I am wrong
in concluding that the appellant was not a de facto
director, I think he exercised the degree of care, diligence and
skill to prevent the failure that a reasonably prudent person
would have exercised in comparable circumstances to prevent the
failure.
[32] One fact
stands out like a sore thumb. The bank had the company's
finances sewn up as tight as a drum. In addition to scooping as
much of the cash as it wanted when it came into the cash room, it
had[2] an absolute
power to veto the payment of any cheques that were issued. The
appellant worked out with the CCRA a payment of $2,400 per week
to clear up the arrears of tax. On one occasion he persuaded the
bank to allow a somewhat larger cheque to the CCRA by threatening
to walk away from the whole business. The bank wanted him around
because if he succeeded in keeping the business afloat or, better
still, if he bought the business — a prospect that was
always in the wind but never came to fruition until TRS went
bankrupt — the bank's chances of getting paid were
enhanced. Apart from this small amount of leverage the appellant
was powerless to ensure that CCRA would get paid. He had to
perform a delicate balancing act with predators snapping at him
from all sides — the bank, the suppliers, the other
creditors, the union and the employees. If he failed the company
would go under and everyone would have lost, including the CCRA
and the 600 employees.
[33] One has
to ask: what could he have done that he did not do? The answer is
absolutely nothing. The case is in some ways reminiscent of
Holmes v. R., [2000] 3 C.T.C. 2235, where the
directors were unable to ensure that the CCRA be paid because the
company's finances were completely controlled by their
supplier. At pages 2241-2242 I referred to an earlier
decision as follows.
I set out in Cloutier v. Minister of National Revenue
(1993), 93 D.T.C. 544 (T.C.C.) at pp. 545-6, my approach in these
cases.
The question therefore becomes one of fact and the court must
to the extent possible attempt to determine what a reasonably
prudent person ought to have done and could have done at the time
in comparable circumstances. Attempts by courts to conjure up the
hypothetical reasonable person have not always been an
unqualified success. Tests have been developed, refined and
repeated in order to give the process the appearance of
rationality and objectivity but ultimately the judge deciding the
matter must apply his own concepts of common sense and fairness.
It is easy to be wise in retrospect and the court must endeavour
to avoid asking the question "What would I have done,
knowing what I know now?" It is not that sort of ex post
facto judgement that is required here. Many judgement calls
that turn out in restrospect to have been wrong would not have
been made if the person making them had the benefit of hindsight
at the time.
Section 227.1 is an example. That section imposes a standard
of care on directors that requires reasonable prudence and skill
in ensuring that the money raised through the SRTC program be in
fact used for scientific research or else that the Part VIII tax
be paid either out of the money so raised or otherwise. In
determining whether that standard has been met one must ask
whether, in light of the facts that existed at the time that were
known or ought to have been known by the director, and in light
of the alternatives that were open to that director, did he or
she choose an alternative that a reasonably prudent person would,
in the circumstances, have chosen and which it was reasonable to
expect would have resulted in the satisfaction of the tax
liability. That the alternative chosen was the wrong one is not
determinative. In cases of this sort of failure to satisfy the
Part VIII liability usually results either from the making of a
wrong choice in good faith, or from deliberate default or wilful
blindness on the part of the director.
I find as a fact that there is nothing that Mr. and Mrs. Holmes
could reasonably have done to prevent the failure. They struck me
as decent, honourable people who did all they could to ensure
that the corporate obligations were fulfilled, but the economic
circumstances rendered that impossible.
[34] This
approach is one that I have followed in other cases and one that
is, I believe, consistent with the series of cases in the Federal
Court of Appeal which have invariably modified the more stringent
standards applied in this court. The cases in the Federal Court
of Appeal to which I am referring are The Queen v. Corsano et
al. (supra), Worrell v. R., [2000]
G.S.T.C. 91, Smith v. The Queen,
2001 DTC 5226, Cameron v. The Queen,
2001 DTC 5405, and Soper v. The Queen,
97 DTC 5407.
[35] I need
not quote from them. They stand for the proposition that
section 227.1 of the Income Tax Act and
subsection 323(3) of the Excise Tax Act require only
that directors act reasonably. They do not demand the impossible.
I have no hesitation in following that approach.
[36]
4.
The final question is whether, if the appellant was a de
facto director, he ceased to be one over two years before the
assessment on September 18, 1995. How does one cease being a
de facto director?[3] Of course you cannot cease being what you were not in
the first place, but accepting for a moment the Crown's
hypothesis that he was at some point a de facto director,
is it enough to throw the keys on the table and say "I
quit" and walk out and then sign a resignation as
president?
[37] I think
it is. These are not mere theatrical gestures signifying nothing.
They were intended to mean something. A de jure director
might have to have his or her resignation accepted by the board
but I know of nothing in corporate law that would impose such a
requirement on a de facto director. Both the throwing of
the keys, which occurred in late April or early May 1993 and the
signing and delivery of the resignation on July 22, 1993
were well outside the two year period before the date of the
assessment. The Crown argues however that these acts were mere
histrionic window dressing, because even after July 22, 1993
the appellant went on merrily signing cheques: plus ça
change, plus c'est la même chose. I do not think
this in itself proves he remained a de facto director
right up to the bankruptcy assuming he ever was one. In any event
the clincher, in my view, is the series of events that occurred
prior to September 18, 1993. On June 22, 1993, a month
before the appellant's formal resignation, the three
directors signed a resolution that TRS make a voluntary
assignment into bankruptcy. On September 15, 1993 the formal
assignment in bankruptcy was signed by Rocco Espositio as
President of TRS. In his affidavit sworn on September 15,
1993 in support of an order permitting the immediate sale of the
assets of TRS, Rocco describes himself as President of TRS. The
agreement between the trustee of TRS and T.R.S. Foods (1993) Ltd.
(the appellant's company) was signed on September 15,
1993. The motion was made on Friday, 17 September 1993. The
assignment was filed with the court on September 20, 1993
and the order of Houlden J. was made on that day.
[38] I do not
think one starts counting from September 20, 1993. Whatever
factual or legal position the appellant may have occupied with
TRS the events described above establish, whether singly or
cumulatively, that he stopped occupying it well before that date.
One simply cannot reconcile these acts with the position that up
to and including September 18, 1993 the appellant was a
de facto director of TRS.
[39] For all
the above reasons and notwithstanding Mr. Bornstein's
usual thorough and skilful presentation of the Crown's case
the appeal is allowed with costs and the assessment made under
section 323 of the Excise Tax Act is vacated.
Signed at Ottawa, Canada, this 10th day of October 2001.
"D.G.H. Bowman"
A.C.J.
COURT FILE
NO.:
96-3504(GST)G
STYLE OF
CAUSE:
Between David William Mosier and
Her Majesty The Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
September 24, 25 and 26, 2001
REASONS FOR JUDGMENT BY: The
Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF
JUDGMENT:
October 10, 2001
APPEARANCES:
Counsel for the Appellant: Michael Gasch, Esq.
Counsel for the
Respondent:
Arnold Bornstein, Esq.
COUNSEL OF RECORD:
For the
Appellant:
Name:
Michael Gasch, Esq.
Firm:
Robins, Appleby & Taub
Toronto, Ontario
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
96-3504(GST)G
BETWEEN:
DAVID WILLIAM MOSIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 24, 25 and 26, 2001,
at Toronto, Ontario, by
The Honourable D.G.H. Bowman
Associate Chief Judge
Appearances
Counsel for the
Appellant:
Michael Gasch, Esq.
Counsel for the Respondent: Arnold
Bornstein, Esq.
JUDGMENT
It is
ordered that the appeal from the assessment made under
section 323 of the Excise Tax Act, notice of which is
dated September 18, 1995 and bears number 04563 be allowed
with costs and the assessment be vacated.
Signed at Ottawa, Canada, this 10th day of October 2001.
A.C.J.
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