Lamarre
Proulx
T.C.J.:
These
appeals
were
heard
together.
The
Appellants
were
assessed
pursuant
to
section
227.1
of
the
Income
Tax
Act
(the
“Art”),
in
their
alleged
capacity
as
directors
of
605892
Ontario
Inc.
(the
“Corporation”)
which
had
failed
to
remit
the
source
deductions
withheld
on
the
salaries
of
its
employees.
Although
the
facts
relate
to
the
same
Corporation,
the
Appellants’
status
was
not
identical
and
some
part
of
the
evidence
was
not
common
to
both
appellants.
Each
appellant
was
represented
by
different
lawyers.
The
Amended
Notices
of
Appeal
are
identical
and
read
as
follows:
2.
This
appeal
relates
to
the
period
beginning
in
October
1992
and
ending
in
December
1993
(the
“Relevant
Period”)
and
to
the
failure
of
605892
Ontario
Inc.
(“605892”)
to
remit
certain
employee
deductions
(income
tax,
Canada
Pension
Plan,
Unemployment
Insurance)
(“Withholdings”)
during
the
Relevant
Period.
3.
(-)
The
Appellant
(-)
never
became
a
director
of
605892,
a
corporation
incorporated
pursuant
to
the
laws
of
Ontario.
605892
carried
on
a
waste
oil
re-refinery
business,
and
was
a
wholly-owned
subsidiary
of
Shannon
Environmental
Ltd.
(“Shannon”),
a
corporation
incorporated
pursuant
to
the
laws
of
Alberta.
4.
Throughout
the
Relevant
Period,
the
business
and
affairs
of
605892
were
managed
by
a
group
of
advisors
(the
“Advisors”)
representing
key
investors
of
605892
via
Shannon.
The
Appellant
and
other
persons
(-)
reported
to
the
Advisors,
who
in
turn
determined
the
course
of
action
of
605892.
5.
The
Appellant
was
not
one
of
the
Advisors.
6.
At
all
times,
the
Advisors
were
aware
of
the
financial
position
of
605892
and
of
the
fact
that
the
Withholdings
were
not
being
remitted
to
Revenue
Canada
on
a
timely
basis.
7.
Throughout
the
Relevant
Period,
the
Appellant
continually
raised
with
the
Advisors
the
issue
of
the
unremitted
Withholdings.
8.
The
Advisors
repeatedly
assured
the
Appellant
that
remittances
of
the
Withholdings
would
be
made.
9.
By
January
1993,
605892’s
plant
was
operating
and
generating
revenue.
Furthermore,
the
Advisors
were
actively
engaged
in
negotiations
with
financiers
to
obtain
additional
financing
for
working
capital.
Accordingly,
at
all
times
the
Appellant
believed
that
the
remittance
of
the
Withholdings
to
Revenue
Canada
would
be
made.
10.
Moreover,
one
of
the
Advisors,
Howard
Taylor,
F.C.A.,
who
eventually
became
one
of
the
largest
shareholders
of
Shannon,
personally
indemnified
the
Appellant
in
the
event
that
the
Appellant
was
pursued
personally
for
the
unremitted
Withholdings.
The
Appellant
has
demanded
payment
pursuant
to
the
indemnity,
but
Mr.
Taylor
refuses
to
honour
the
indemnity.
11.
During
the
Relevant
Period,
certain
payments
were
made
by
605892
to
Revenue
Canada
on
account
of
the
Withholdings.
12.
From
approximately
April
1993
onwards,
(-)
the
Appellant
derived
no
remuneration
from
605892
or
Shannon.
The
Replies
to
the
Amended
Notices
of
Appeal
are
also
almost
identical.
In
the
matter
of
the
Appellant
Parton,
it
is
the
following:
7.
In
so
assessing
the
Appellant,
the
Minister
relied
on,
inter
alia,
the
following
assumptions:
(a)
the
Appellant
was,
at
all
material
times,
a
director
of
the
Corporation;
(b)
the
Appellant
represented
to
the
Minister
that
he
was
a
director
of
the
Corporation
during
the
Relevant
Period:
(c)
the
Corporation
failed
to
remit
to
the
Receiver
General
federal
income
tax
withheld
from
the
wages
paid
to
its
employees
in
the
amount
of
$133,900
as
set
out
in
Schedule
“A”
attached
hereto;
(d)
the
Corporation
failed
to
pay
penalties
and
interest
relating
to
the
unremitted
Federal
tax
in
the
amounts
of
$6,392.19
and
$32,371.61
respectively;
(e)
certificates
for
the
amount
of
the
Corporation’s
liability
for
Federal
income
tax,
penalties
and
interest
were
registered
in
the
Federal
Court
of
Canada
under
subsection
223(2)
of
the
Income
Tax
Act,
R.S.C.
1985,
c.
1
(5th
Supp.),
as
amended
(the
“Ac?’)
as
follows:
(i)
an
amount
of
$100,206.28
was
certified
on
May
14,
1993;
(ii)
an
additional
amount
of
$215,223.44
was
certified
on
January
22,
1996;
and
execution
for
such
amounts
was
returned
wholly
unsatisfied
on
February
20,
1996;
(f)
the
Appellant
did
not
exercise
the
degree
of
care,
diligence
and
skill
to
prevent
the
failure
to
remit
the
said
amount
by
the
Corporation
that
a
reasonably
prudent
person
would
have
exercised
in
comparable
circumstances;
(g)
the
Appellant
and
Donald
Sickle
were
the
bank
signing
officers
of
the
Corporation;
(h)
the
Appellant
was
fully
cognizant
of
the
Corporation’s
failure
to
remit
employee
withholdings;
(i)
the
Appellant
knowingly
attempted
to
sustain
the
Corporation’s
operations
by
conserving
cash
to
the
maximum
extent
possible,
including
the
deferral
of
payment
of
employees
source
deductions;
(j)
the
Corporation’s
corporate
charter
was
cancelled
by
the
Corporations
Branch,
Ministry
of
Consumer
and
Commercial
Relations,
on
October
25,
1995
for
default
in
complying
with
the
Corporations
Tax
Act.
The
Amended
Notices
of
Appeal
submitted
that
the
Appellants
never
became
directors
of
the
Corporation
but
did
not
relate
the
facts
upon
which
this
proposition
was
made.
The
statutory
provisions
relied
upon
were
sections
of
the
Ontario
Business
Corporations
Act,
(usually
referred
to
later
as
the
O.B.C.A),
that
were
concerned
with
the
appointment
of
a
director
under
that
Act.
At
the
hearing,
it
was
proposed
that
the
appointment
of
the
Appellants
as
directors
had
not
been
made
in
accordance
with
the
O.B.C.A.:
there
was
no
resolution
changing
the
number
of
directors
for
the
board
of
directors
from
6
to
2,
the
board
of
directors
did
not
have
the
required
quorum
when
the
Appellants
were
purportedly
appointed
and
there
had
not
been
a
resolution
of
the
shareholders
ratifying
the
purported
change.
The
Appellants
also
submitted
that
the
business
and
affairs
of
the
Corporation
were
managed
by
a
group
of
advisors
representing
the
key
investors
and
that
the
Appellants
reported
to
these
advisors,
who
in
turn
determined
the
course
of
action
of
the
Corporation.
The
Appellants
claim
that,
at
all
times,
the
advisors
were
aware
that
the
source
deductions
were
not
remitted.
The
Appellants
continually
raised
with
the
advisors
the
issue
of
the
unremitted
deductions
at
source
and
the
advisors
assured
the
Appellants
that
they
would
be
made.
It
is
the
Appellants’
position
that
there
was
no
option
given
to
the
Appellants
to
remit
the
source
deductions.
Certain
payments
were
made
by
the
Corporation
to
Revenue
Canada.
The
Appellants
also
emphasized
the
fact
that
from
April
1993,
they
did
not
receive
any
remuneration
for
their
work
for
the
Corporation.
The
issues
before
the
Court
are
essentially
threefold:
First,
it
must
be
determined
whether
the
Appellants
were
de
jure
or
de
facto
directors
pursuant
to
the
O.B.C.A.
Secondly,
if
it
is
found
that
the
Appellants
were
de
facto
directors,
it
must
be
determined
whether
section
227.1
of
the
Act
applies
to
de
facto
directors.
Finally,
if
it
is
established
that
section
227.1
applies
to
the
Appellants,
the
Court
must
determine
whether
the
Appellants
exercised
due
diligence.
The
Respondent
also
raised
the
question
of
whether
the
notion
of
estoppel
applied,
preventing
the
Appellants
from
contesting
their
appointment
as
directors.
Ms.
Sandra
Cameron-Milkes
was
the
first
witness
for
the
Appellants.
She
had
brought
with
her
the
minute
book
of
the
Corporation.
The
purpose
of
her
testimony
was
to
show
that
the
minute
book
had
not
been
tampered
with.
Ms.
Cameron-Milkes
is
a
law
clerk
for
a
firm
of
lawyers.
The
minute
book
was
produced
as
Exhibit
A-2,
which
is
the
original,
and
Exhibit
A-3,
which
is
a
photocopy
of
the
minute
book.
The
registration
of
the
Corporation
was
produced
as
Exhibit
A-1.
Both
the
Appellants
testified.
They
produced
Exhibit
A-4,
which
is
a
book
of
documents
containing
tabs
I
to
74.
Further
to
their
testimony,
Mr.
Robert-David
Swim,
a
tax
collector
for
Revenue
Canada,
testified
at
the
Respondent’s
request.
Both
Appellants
had
been
senior
executives
for
important
corporations.
Mr.
Parton
had
lost
his
job
from
Shell
Oil
in
1986.
After
that
he
became
a
business
consultant.
Mr.
Sickle
worked
25
years
for
North
American
Life
as
a
director
of
information.
He
had
been
a
management
consultant
since
October
1990.
The
Corporation
submitted
a
tender
to
purchase
the
assets
of
Oil
Canada
Limited
(“OCL”),
an
oil
re-refining
operation
located
at
309
Cherry
Street,
Toronto,
from
a
trustee
in
bankruptcy,
Coopers
and
Lybrand
Limited.
On
December
12,
1990,
it
was
ordered
that
upon
payment
of
the
sum
of
$5.6
million
to
the
receiver,
that
the
land
and
property
be
vested
in
the
purchaser.
The
tender
and
conditions
of
sale
provided
that
the
closing
date
would
be
December
31,
1990.
As
the
purchaser
was
unable
to
raise
the
financing
to
close
the
transaction,
there
were
many
delays
and
the
date
of
closing
was
extended
to
September
30,
1991.
The
purchase
price
for
the
property
was
increased
to
$6.1
million.
There
was
a
danger
that
the
purchaser
might
have
to
forfeit
the
$1,348,530.10
deposit
to
the
receiver.
The
Minutes
of
Settlement
(pages
85
to
101
of
Exhibit
A-2)
were
dated
August
14,
1991
and
amended
August
29,
1991.
Shannon
Energy
Limited,
the
controlling
shareholder
of
the
Corporation
agreed
to
cosign
the
agreement.
The
Corporation
was
a
subsidiary
of
Shannon
Energy
Limited.
The
board
of
directors
of
the
Corporation
consisted
of
six
directors
(page
9
of
Exhibit
A-2).
On
October
29,
1991,
at
a
meeting
of
the
board
of
directors,
four
directors
tendered
their
resignation
(pages
102
to
120
of
Exhibit
A-2).
Mr.
Sickle
was
appointed
a
director
at
that
directors’
meeting.
Mr.
John
Pozhke
and
Douglas
Hooper
remained
directors.
The
board
was
thus
composed
of
three
directors.
On
November
25,
1991,
a
resolution
of
the
board
of
directors
authorized
the
issuance
of
a
promissory
note
and
debenture
to
secure
the
balance
of
the
purchase
price
owing
by
the
Corporation
to
the
receiver.
For
this
particular
resolution,
there
were
three
directors
who
signed,
Mr.
John
Gregory
Pozhke,
Mr.
Douglas
Hooper
and
Mr.
Donald
G.
Sickle.
Mr.
Pozhke
signed
the
resolution
as
the
President
of
the
Corporation
(page
125
of
Exhibit
A-2).
On
that
same
day,
there
is
another
resolution
of
the
board
of
directors
to
enter
into
a
priority
agreement
among
the
Receiver,
Shannon
Energy
Ltd.
and
Central
Guaranty
Trust
Company
(page
124
of
Exhibit
A-2).
Tab
25
of
Exhibit
A-4
is
a
consultancy
contract
between
R.J.
Parton
Management
Services
and
Shannon
Energy
Limited.
This
contract
was
for
a
six-month
period
commencing
on
the
date
of
closing
of
the
purchase
of
the
assets
of
Oil
Canada
Limited
from
the
receiver.
The
fees
were
$8,000
per
month.
This
document
was
accepted
on
the
27th
of
November,
1991.
Regarding
Mr.
Sickle,
the
management
agreement
appears
at
Tab
28
of
Ex-
hibit
A-4.
It
would
appear
that
management
fees
in
the
amount
of
$8,000
per
month
were
to
be
retroactive
to
January
1991.
Tabs
23
and
24
of
Exhibit
A-4
show
that
the
two
Appellants
had
wanted
to
be
insured
against
their
liability
as
directors.
However,
they
acted
as
directors
without
having
obtained
a
formal
indemnity.
On
November
28,
1991,
Mr.
Parton
accepted
to
become
a
director
of
the
Corporation
and
Mr.
Hooper
resigned
his
position
as
director
(pages
126
and
127
of
Exhibit
A-2).
On
December
5,
1991,
a
memorandum
from
the
Appellants
(Tab
26
of
Exhibit
A-4)
to
the
members
of
the
advisory
committee
stated
that
a
cash
deficiency
in
the
amount
of
$142,000
was
expected
for
the
month
of
December.
The
memorandum
states
that
they
estimated
the
fixed
costs
for
the
month
of
January
to
be
in
the
order
of
$125,000
and
that
[t]he
above
forecasts
make
no
allowance
for
specific
emergency
repairs
of
the
physical
plant.
The
Appellants
concluded
that
there
is
an
immediate
cash
problem
that
must
be
dealt
with
to
protect
the
shareholders’
investment.
This
memorandum
also
shows
that
the
Appellants
knew
that
the
Corporation
was
already
in
arrears
of
tax
in
the
amount
of
$80,000.
There
was
a
unanimous
shareholders
agreement
dated
October
31,
1991.
It
was
amended
on
September
15,
1992,
between
all
the
shareholders
of
the
Corporation,
to
exchange
the
shares
now
held
by
Shannon
Energy
Limited
for
common
shares
of
Shannon
on
the
basis
of
a
total
of
16
million
common
shares
of
Shannon
for
the
total
of
499
shares
of
the
Corporation.
This
document
is
reproduced
at
page
208
of
Exhibit
A-2.
Section
3.03
of
this
document
contained
restrictions
on
the
directors
of
the
Corporation.
The
board
of
directors
did
not
have
power
or
authority
to
allot,
reserve
or
issue
additional
shares
in
the
capital
of
the
Corporation.
The
amendment
to
the
share
exchange
agreement
is
reproduced
at
page
229
of
Exhibit
A-2.
It
is
dated
September
16,
1992.
On
June
19,
1992,
Mr.
Pozhke
tendered
his
resignation
as
a
director
and
president
(page
133
of
Exhibit
A-2).
On
that
day,
Mr.
Parton
was
elected
president
and
Mr.
Sickle
secretary
of
the
Corporation
(page
135
of
Exhibit
A-2).
The
Corporation
had
from
then
on
two
directors:
the
Appellants.
That
resolution
was
signed
by
Messrs.
Parton
and
Sickle.
Thereafter,
Messrs.
Parton
and
Sickle
held
themselves
out,
respectively,
as
president
and
secretary
of
the
Corporation.
For
example,
for
the
purposes
of
the
Corporation’s
banking
activities
at
the
National
Bank
as
of
July
15,
1992,
the
Appellants
listed
themselves
as
directors
of
the
Corporation
(Exhibit
A-2,
page
136).
On
March
23,
1993,
the
first
letter
was
sent
by
Revenue
Canada
to
the
Appellants
in
their
capacity
as
directors
(Tab
11
of
Exhibit
A-4).
This
letter
explained
in
comprehensible
language
the
directors’
liability.
On
June
30,
1993,
Revenue
Canada
sent
a
reminder
letter
to
the
Appellants
(Tabs
12
and
13
of
Exhibit
A-4).
On
July
28,
1993,
the
Appellant
Parton,
in
his
capacity
as
president,
explained
in
a
letter
to
Revenue
Canada
that
the
deficiencies
in
remitting
the
source
deductions
were
caused
by
a
difficult
start-up
period
(Tab
14
of
Exhibit
A-4).
Here
are
some
of
his
words:
…]
can
assure
you
that
we
are
operating
the
company
through
a
very
difficult
start-up
period
to
enhance
the
value
for
all
stakeholders.
As
Mr.
Sickle
has
probably
advised,
both
he
and
I
are
significant
creditors
of
the
company
as
we
are
several
months
behind
in
the
receipt
of
our
contractual
fee
income.
At
this
time,
1
believe
that
we
are
in
the
process
of
turning
the
corner
for
the
Shannon
operation.
We
have
established
ourselves
in
the
market
place,
and
consequently
we
are
beginning
to
see
a
demand
level
for
our
lubricating
base
oils
that
will
be
more
than
sufficient
to
enable
the
company
to
survive.
The
Appellants
stated
that
they
ceased
to
draw
their
fees
as
of
March
15,
1993.
On
page
235
of
Exhibit
A-2,
there
appears
the
notice
sent
by
the
Appellants
pursuant
to
the
Corporations
Information
Act.
It
is
dated
August
10,
1993.
On
page
236,
it
shows
that
Mr.
Sickle
and
Mr.
Parton
are
the
two
directors
of
the
Corporation.
On
page
242,
it
shows
that
the
Corporation
carried
on
business
under
the
name
of
Shannon
Environmental
Services.
On
January
27,
1994,
the
Appellant
Parton
in
his
capacity
as
president
sent
another
letter
to
Revenue
Canada
(Tab
15
of
Exhibit
A-4).
On
February
17,
1994,
both
Appellants
sent
a
common
letter
to
Revenue
Canada
(Exhibit
A-4,
Tab
16).
These
letters
describe
avenues
of
financing
that
are
being
negotiated
and
explain
that
operations
were
maintained
at
the
plant
in
the
desire
to
maintain
the
maximum
value
for
all
stakeholders
including
Revenue
Canada.
Tab
8
of
Exhibit
A-4
reproduces
a
report
made
by
Mr.
R.D.
Swim,
dated
April
1,
1996.
The
report
states
that
the
account
was
originally
assigned
to
Collections
on
December
24,
1992
and
that
from
February
1993
to
September
1993,
the
Corporation
made
payments
in
the
amount
of
$65,000
to
Revenue
Canada.
On
January
7,
1994,
after
the
Corporation
had
failed
to
make
its
monthly
remittances
for
a
number
of
months,
requirements
to
pay
were
issued
to
two
bank
accounts.
These
instruments
recovered
$4,140.
The
failure
to
remit
deductions
were
in
respect
of
the
period
October
1992
to
December
1993.
The
report
of
the
Appeals
officer
is
at
Tab
9
of
Exhibit
A-4.
Both
Appellants
were
aware
from
the
start
of
the
directors’
liability.
The
Appellants
stated
at
the
hearing
that
the
Corporation
had
attempted
very
strenuously
to
raise
financing
but
most
attempts
failed.
The
Appellants
referred
to
some
promotional
action
to
raise
financing
organised
jointly
with
the
directors
and
some
advisers
that
succeeded.
But
it
was
far
from
enough.
The
Corporation
was
in
financial
difficulty
from
the
beginning.
The
income
was
never
sufficient
to
meet
the
operational
expenses.
The
Appellants
stated
that
the
Corporation
was
managed
by
a
group
of
advisors
representing
the
key
investors
in
the
Corporation
to
whom
the
Appellants
reported;
the
advisors
determined
the
course
of
action
of
the
Corporation;
and
at
all
times,
the
advisors
were
cognizant
of
the
financial
position
of
the
Corporation
and
of
the
fact
that
the
deductions
at
source
were
not
being
remitted
on
a
timely
basis.
Tab
33
and
47
of
Exhibit
A-4
are
memoranda
to
the
advisors.
They
are
dated
January
3,
1993
and
September
13,
1993.
They
discuss
the
cash
needs
of
the
Corporation
but
there
is
no
mention
of
a
failure
to
remit
source
deductions.
Tabs
44
and
46
of
Exhibit
A-4
are
notes
for
comments
to
the
shareholders
prepared
by
Mr.
Parton.
There
is
no
mention
of
the
deficiencies
in
remitting
source
deductions
in
the
comments
to
the
shareholders.
Tab
46
also
refers
among
other
things
to
the
annual
meeting
of
shareholders
held
on
August
26,
1993.
Tab
69
of
Exhibit
A-4
is
a
letter
dated
October
31,
1994,
from
Mr.
Sickle
to
the
advisors
and
it
says
the
following:
Early
this
year,
when
it
seemed
that
605892
Ontario
Inc.
would
not
be
rescued
by
any
of
the
proposed
financing
deals
then
being
discussed,
I
wrote
a
letter
to
you
outlining
the
urgency
of
action
lest
the
receiver
take
action
before
any
financing
actually
took
place.
In
that
letter
I
requested
for
Richard
Parton
and
myself
an
indemnity
from
liability
with
regard
to
our
exposure
regarding
payroll
deductions.
This
request
was
ignored.
I
remind
you
that
verbal
assurances
were
made
to
me
that
we
would
not
be
allowed
to
suffer
personal
loss
as
a
result
of
our
efforts
to
keep
the
company
afloat
until
financing
was
completed.
Tab
14
of
Exhibit
R-]
is
a
letter
addressed
to
Mr.
Swim
of
Revenue
Canada
by
Mr.
Sickle.
There
is
an
identical
letter
at
Tab
15
signed
by
Mr.
Parton.
They
are
both
dated
November
23,
1994.
It
says
the
following:
2.
Relationship
of
Messrs.
Donald
G.
Sickle
and
Mr.
Richard
G.
Parton
to
Company:
Messrs.
Sickle
and
Parton
were
contracted
by
Mr.
White
on
behalf
of
the
company
during
late
1991
to
oversee
the
rehabilitation
of
the
company’s
waste
oil
re-refinery
and
bring
the
facilities
into
operation.
Due
to
the
undercapitalized
nature
of
the
venture,
no
individuals
were
prepared
to
act
in
the
formal
position
of
directors.
To
facilitate
the
re-establishment
of
the
environmentally
desirable
venture,
Messrs.
Sickle
and
Parton
agreed
to
act
in
this
position.
3.
Due
Diligence
of
Messrs.
Donald
G.
Sickle
and
Richard
J.
Parton
From
the
outset,
as
a
result
of
the
absence
of
a
traditional
board
of
directors,
an
“Advisory
Board”,
comprising
Messrs.
Howard
Taylor,
William
White
and
Donald
Haldenby
was
constituted
to
provide
financing
and
business
counsel
to
Messrs.
Sickle
and
Parton.
Regular
meetings
of
this
group
were
held
at
which
financing
and
operational
reports
were
shared
between
the
parties.
In
the
summer
of
1992,
Mr.
Haldenby
resigned
from
the
Advisory
Board,
and
the
Advisory
Board
was
dissolved.
However,
regular
meetings
continued
to
be
held
by
Messrs.
Sickle
and
Parton
with
Messrs.
Taylor
and
White
to
facilitate
financing
activities
and
to
obtain
general
business
perspective
and
guidance.
Messrs.
Sickle
and
Parton
were
advised
that
they
should
attempt
to
sustain
the
operations
by
conserving
cash
to
the
maximum
extent
possible,
including
the
deferral
of
payment
of
source
deductions,
as
it
would
be
easier
to
finance
an
operating
company
as
contrasted
with
an
inactive
company.
In
response
to
the
question
concerning
personal
liability
for
the
non-remittance
of
source
deductions,
Mr.
Taylor
stated
that
if
that
eventuality
were
to
arise,
he
would
assume
the
liability.
The
Appellants
were
assessed
in
the
amount
of
$288,129.59.
Tabs
23
and
24
of
Exhibit
R-1
show
the
assessment
and
the
reconciliation
of
corporate
assessments
for
unremitted
source
deductions.
Appellants’
arguments
As
was
mentioned
at
the
beginning,
each
Appellant
had
his
own
counsel.
However,
for
the
most
part,
counsel’s
arguments
were
meant
for
the
two
Appellants
as
both
counsel
agreed
on
the
means
of
defence.
The
only
point
where
there
was
a
factual
difference
was
the
manner
in
which
each
Appellant
was
purportedly
appointed
director.
In
addition,
it
was
agreed
by
counsel
for
the
Respondent
that
the
Appellants
appointment
may
have
been
defective.
In
view
of
this
and
to
avoid
repetition,
I
will
refer
to
the
arguments
by
both
counsel
except
if
necessary.
Counsel
for
the
Appellants
submitted
that
the
Appellants
were
not
liable
under
subsection
227.1(1)
of
the
Act,
based
on
the
following:
(a)
they
never
became
directors
of
the
Corporation
as
their
appointments
were
a
nullity;
and
(b)
if
they
were
directors,
they
exercised
due
diligence.
Counsel
for
the
Appellants
wanted
first
to
put
the
conduct
of
the
Appellants
in
the
context
of
the
startup
of
a
business.
The
Appellants
believed
that
the
advisors
would
find
the
required
sources
of
financing
and
that
a
substantial
amount
of
money
had
been
found.
The
Appellants
do
not
suggest
that
they
did
not
know
about
the
various
directors’
liabilities.
However,
they
were
under
pressure
from
the
advisors
and
they
did
the
best
they
could
under
the
circumstances.
Counsel’s
views
were
that
it
is
simply
unjust
to
impose
vicarious
liability
on
the
Appellants
who
acted
as
dupes
or
puppets
and
who
had
no
direct
interest
in
the
outcome
of
the
company.
Counsel
for
the
Appellants
points
out
that
the
Act
does
not
define
the
term
“director”.
In
order
to
determine
whether
or
not
someone
is
a
director,
one
must
look
to
the
company’s
incorporating
legislation:
Kalef
v.
R.
(1996),
96
D.T.C.
6132
(Fed.
C.A.).
The
Corporation
was
incorporated
under
the
O.B.C.A.
This
Act
defines
the
term
“director”
as
follows
at
subsection
1(1):
“director”
means
a
person
occupying
the
position
of
director
of
a
corporation
by
whatever
name
called,
and
“directors”
and
“board
of
directors”
include
a
single
director.
The
O.B.C.A.
includes
a
number
of
provisions
which
deal
with
the
election
and
appointment
of
directors.
There
are
three
ways
in
which
a
person
can
become
a
de
jure
director
under
the
0.B.C.A.:
(1)
a
person
can
be
named
as
a
director
in
the
corporation’s
articles:
subsection
119(1)
of
the
O.B.C.A.
Counsel
for
the
Appellants
submitted
that
this
was
not
the
Appellants’
case;
(2)
a
person
can
be
elected
as
a
director
by
the
shareholders
of
the
corporation
at
their
annual
meeting:
subsection
119(4)
of
the
O.B.C.A.
Article
3.05
of
the
Corporation’s
by-laws
specifically
provides
that
the
directors
of
the
Corporation
will
be
elected
at
the
annual
meeting
of
the
shareholders
by
way
of
a
resolution.
Counsel
for
the
Appellants
suggest
that
no
evidence
has
been
presented
which
shows
that
a
meeting
of
the
Corporation’s
shareholders
was
ever
held
during
the
time
the
Appellants
were
involved
with
the
Corporation.
(3)
a
person
can
be
appointed
as
a
director
by
a
corporation’s
directors
in
limited
circumstances.
The
O.B.C.A.
generally
permits
the
directors
of
a
corporation
to
fill
a
vacancy
in
the
board
of
directors
provided
that
there
is
a
quorum:
subsection
124(1)
of
the
O.B.C.A.
The
O.B.C.A.
provides
that
the
majority
of
the
number
of
directors
required
by
the
articles
constitutes
a
quorum.
There
were
articles
of
amendment
dated
January
10,
1991,
in
which
the
directors
were
set
at
six.
Therefore
a
quorum
of
four
was
required
in
order
to
appoint
new
directors
to
fill
the
vacancies.
In
addition,
the
directors
had
no
authority
to
fill
the
vacancies
on
the
Corporation’s
board
of
directors
as
article
3.07
of
the
by-laws
provides
that
the
shareholders
will
fill
any
vacancies
on
the
board
of
directors.
According
to
counsel
for
the
Appellants,
the
evidence
shows
that
Mr.
Parton
consented
to
serve
as
a
director
of
the
Corporation
on
November
28,
1991.
However,
the
evidence
also
showed
that
Mr.
Parton
was
never
appointed
a
director
by
the
board
of
directors.
The
Corporation’s
minute
book
included
no
directors
resolution
or
minutes
of
directors’
meetings
which
appointed
Mr.
Parton
as
a
director.
Even
if
such
a
resolution
did
exist,
there
were
not
enough
directors
on
November
21,
1991
or
at
any
later
date
to
fill
a
vacancy
in
the
board
of
directors.
On
October
29,
1991,
four
of
the
directors,
named
in
the
articles
of
amendment,
resigned
and
no
directors
were
properly
elected
by
the
shareholders
to
replace
them.
Therefore,
it
was
not
possible
for
Mr.
Parton
to
have
been
appointed
as
a
director
by
the
board
of
directors.
With
respect
to
whether
the
Appellants
were
de
facto
directors
of
the
Corporation,
counsel
for
the
Appellants
submitted
that
the
common
law
recognized
the
concept
of
the
de
facto
directors
in
certain
circumstances,
although
there
was
no
concession
on
this
point.
These
were
persons
who
were
considered
to
be
directors
by
their
actions
as
opposed
to
by
election
or
appointment.
The
evidence
has
shown
that
the
Appellants
held
themselves
out
to
be
directors
of
the
Corporation.
They
signed
a
number
of
documents
stating
that
they
were
directors
of
the
Corporation.
They
believed
that
they
were
directors
of
the
Corporation,
although
they
were
never
properly
elected
or
appointed
to
that
position.
This
does
not
cause
the
Appellants
to
be
de
facto
directors.
On
the
contrary,
the
evidence
has
shown
that
the
advisors
were
the
directing
minds
or
de
facto
directors
of
the
Corporation.
Counsel
for
the
Appellants
referred
to
sections
19
and
128
of
the
O.B.C.A.
Section
128
of
the
O.B.C.A.
reads
as
follows:
128.
Validity
of
acts
of
directors
and
officers.
An
act
done
by
a
director
or
by
an
officer
is
not
invalid
by
reason
only
of
any
defect
that
is
thereafter
discovered
in
his
or
her
appointment,
election
or
qualification.
Counsel
for
the
Appellants
referred
to
a
decision
of
this
Court
in
Whee-
liker
v.
R.
(1997),
98
D.T.C.
1110
(T.C.C.),
at
page
1113:
1
do
not
agree
that
section
97
of
the
Companies
Act
and
section
132
of
the
Articles
resolve
the
issue.
In
my
opinion
these
provisions
validate
acts
of
persons
who
are
not
de
jure
directors
but
who
act
as
directors
anyway.
The
provisions
are
meant
to
protect
third
parties
dealing
in
good
faith
with
such
persons
by
validating
their
acts.
They
do
not
relate
to
imposing
a
vicarious
tax
liability
on
a
person
for
a
failure
to
act;
1.e.,
a
failure
to
remit
source
deductions.
Section
97
mentioned
in
the
quotation
is
a
provision
of
the
Nova
Scotia
Companies
Act.
It
is
similar
to
section
128
of
the
O.B.C.A.
Counsel
for
the
Appellants
also
referred
to
the
decision
of
the
House
of
Lords
in
Morris
v.
Kanssen,
[1946]
1
All
E.R.
586
(U.K.
H.L.)
at
page
590:
There
is,
as
it
appears
to
me,
a
vital
distinction
between
(a)
an
appointment
in
which
there
is
a
defect
or,
in
other
words,
a
defective
appointment,
and
(b)
no
appointment
at
all.
In
the
first
case,
it
is
implied
that
some
act
is
done
which
purports
to
be
an
appointment
but
is
by
reason
of
some
defect
inadequate
for
the
purpose:
in
the
second
case,
there
is
not
a
defect;
there
is
no
act
at
all....
...
The
point
may
be
summed
up
by
saying
that
the
section
and
the
article,
being
designed
as
machinery
to
avoid
questions
being
raised
as
to
the
validity
of
transactions
where
there
has
been
a
slip
in
the
appointment
of
a
director,
cannot
be
utilized
for
the
purpose
of
ignoring
or
overriding
the
substantive
provisions
relating
to
such
appointment.
Counsel
for
the
Appellants
submitted
that
there
was
no
appointment
at
all
in
the
case
of
the
Appellants.
If,
however
it
were
found
that
the
Appellants
were
de
facto
directors
of
the
Corporation
according
to
the
common
law,
they
argued
that
statutory
exceptions
to
fundamental
principles
of
law
should
be
strictly
construed.
In
this
case,
the
imposition
of
vicarious
liability
on
a
de
facto
director
for
the
liabilities
of
the
Corporation
constitutes
an
exception
to
the
common
law
separation
between
corporations
and
directors.
Did
the
Appellants
exercise
a
degree
of
care,
diligence
and
skill
to
prevent
the
Corporation’s
failure
to
remit
source
deductions
that
a
reasonably
prudent
person
would
have
exercised
in
comparable
circumstances?
Counsel
for
the
Appellants
submitted
that
they
should
not
be
found
liable
under
subsection
227.1(1)
of
the
Act
for
three
reasons:
(1)
remittances
were
made
to
the
Receiver
General
when
funds
were
available;
(2)
they
did
everything
that
they
could
to
bring
the
remittance
problem
to
the
attention
of
the
advisors;
and
(3)
the
Appellants
were
precluded
from
paying
the
amounts
owed
to
Revenue
Canada
due
to
the
instructions
of
the
advisors.
In
other
words,
they
had
lost
their
freedom
of
choice
as
directors.
Counsel
for
the
Appellant
cited
Robitaille
v.
R.
(1989),
90
D.T.C.
6059
(Fed.
T.D.)
at
6062:
...I
would
be
prepared
to
hold
that,
even
without
considering
section
227.1(3),
there
would
be
no
liability
on
the
directors
under
section
227.1(1)
because
the
latter
obviously
contemplates
that
the
corporation
is
freely
acting
through
its
Board
of
Directors.
The
exercise
of
freedom
of
choice
on
the
part
of
the
director
is
essential
in
order
to
establish
personal
liability.
Respondent’s
arguments
Counsel
for
the
Respondent
referred
to
a
decision
of
the
King’s
Bench
of
Manitoba
in
Northern
Trust
Co.
v.
Butchart,
[1917]
2
W.W.R.
405
(Man.
K.B.),
to
point
out
that
de
facto
directors
are
liable
for
all
their
acts
of
omission
or
commission
in
the
same
manner
and
to
the
same
extent
as
if
they
had
been
de
jure
directors.
She
quoted
the
decision
at
pages
414
and
415:
...Whatever
may
be
said
with
respect
to
his
co-defendants,
he
was
an
active
participant
in
all
the
wrongdoing
disclosed.
The
conduct
of
the
defendant
Ford
after
he
became
a
director
in
June
1913
is
but
slightly
less
reprehensible.
He
was
the
accountant
in
charge
of
the
company’s
books,
and
must
have
known
not
only
that
the
company
had
no
profits,
but
that
its
capital
was
becoming
rapidly
exhausted.
Both
he
and
the
defendant
Trick
set
up
the
defence
that
they
were
never
legally
elected
directors,
and
1
think
that
much
must
be
conceded.
There
was
no
shareholders’
meeting
held
in
June
1913,
although
what
purports
to
be
the
minutes
of
such
a
meeting
were
written
up
by
Ford,
and
pasted
in
the
minute
book.
By
these
minutes
both
he
and
Trick
are
named
directors,
and
they
both
consented
to
act
as
directors.
That
they
had
assumed
the
functions
of
directors
is
shown
by
the
protest
which
they
signed
in
January
1915,
if
there
was
no
other
evidence
of
their
acting.
Whether
they
were
legally
elected
or
not
makes
no
difference.
They
were
de
facto
directors,
and
for
all
acts
of
omission
or
commission
on
their
part,
they
are
liable
in
the
same
manner
and
to
the
same
extent
as
if
they
had
been
de
jure
as
well
as
de
facto
directors,
Dixon’s
Case,
14
Ch.
D.
660:
Owen
Sound
Lumber
Co.,
Re,
34
O.L.R.
528.
He
however,
assumed
the
position
of
a
director
and
with
it
the
responsibility.
It
would
never
do
to
permit
a
director
who
actively
participates
in
the
commission
of
a
wrong
to
excuse
himself
from
liability
upon
the
plea
that
he
was
under
the
control
of
and
acted
by
direction
of
somebody
else....
Counsel
for
the
Respondent
also
referred
to
the
decision
of
the
Ontario
Supreme
Court,
Appellate
Division,
in
Owen
Sound
Lumber
Co.,
Re
(1917),
33
D.L.R.
487
(Ont.
C.A.).
This
decision,
according
to
counsel,
incorporates
the
classic
statement
that
has
been
adopted
by
courts
throughout
the
country
in
situations
where
there
had
been
an
improper
appointment
of
a
person
as
a
director
and
that
person
acts
in
this
capacity.
She
referred
to
page
492:
As
to
the
second
point,
I
agree
with
the
view
of
Middleton,
J.,
that,
when
the
directors
assumed
the
fiduciary
office
of
director,
they
became
liable
in
all
respects
as
though
rightly
appointed
to
that
office.
To
hold
otherwise
would
be
to
say
that
a
man
might
do
wrongful
acts
affecting
the
company’s
assets,
and
yet
enjoy
immunity
if
he
could
show
some
defect
in
his
appointment.
If
this
were
the
case,
it
would
become
fashionable
to
usurp
the
office
on
these
terms
rather
than
to
accept
it
in
a
legitimate
but
less
favoured
way.
She
also
referred
to
a
decision
of
the
Alberta
Supreme
Court
in
Oliver
v.
Elliott
(1960),
23
D.L.R.
(2d)
486
(Alta.
T.D.).
This
decision
concerns
the
curative
provision
of
the
Alberta
Companies
Act
which
is
identical
to
section
128
of
the
O.B.C.A.
She
quotes
at
page
491:
...
There
can
be
no
doubt
that
the
intention
of
the
meetings
of
March
20th
was
to
appoint
them
directors
of
the
two
companies.
They
did
not
become
directors
simply
because
there
was
a
defect
in
their
appointment.
That
being
so,
until
effective
proceedings
were
taken
to
prevent
them
acting
as
directors,
their
acts
were,
in
my
view,
governed
by
the
curative
sections
of
the
statute
and
the
articles,
and
by
the
principle
laid
down
in
Dawson
v.
African
Consolidated
(supra).
In
other
words
the
acts
of
the
directors
at
the
meeting
of
March
23rd,
including
the
appointment
of
two
new
directors,
were
valid
and
effective,
despite
the
defects
in
the
appointment
of
some
of
the
existing
directors.
Counsel
for
the
Respondent
submitted
that
without
going
into
the
details
of
the
defects
in
the
appointment
of
the
directors
in
that
case,
it
may
be
said
without
doubt,
that
they
were
very
similar
to
the
defects
raised
in
the
present
instance.
Regarding
the
due
diligence
aspect,
counsel
for
the
Respondent
submitted
that
the
diligence
that
is
required
is
one
that
has
put
in
place
the
means
to
prevent
the
non
remittances.
The
Appellants
did
not
set
up
such
a
system,
they
have
done
exactly
the
opposite.
They
did
nothing
to
prevent
the
failure.
In
fact
they
caused
the
failure.
They
chose
to
pay
other
suppliers
to
keep
the
business
active.
Conclusion
My
analysis
of
the
evidence
leads
me
to
conclude
that
the
Appellants’
appointment
as
directors
was
not
a
nullity
as
was
suggested
by
their
counsel
on
the
basis
of
the
decision
in
Morris,
supra,
a
quotation
of
which
is
found
at
paragraph
39
of
these
Reasons.
This
decision
distinguishes
between
defective
appointment
and
no
appointment.
There
is
a
defective
appointment
where
the
acts
purporting
to
appoint
come
from
the
directors
or
the
share-
holders
but
are
not
in
conformity
with
the
statutory
act
or
the
charter
or
the
by-laws
of
the
corporation.
There
is
no
appointment
where
there
is
usurpation
of
the
function
of
directors.
In
this
instance,
the
appointments
were
defective
but
it
was
not
a
case
where
there
was
no
appointment
at
all.
Some
acts
were
done
which
purported
to
be
appointments.
There
was
no
usurpation
of
the
function
of
directors
by
the
Appellants.
Besides,
these
appointments
appear
to
have
been
acquiesced
to
by
the
totality
of
the
shareholders.
Contrary
to
what
counsel
for
the
Appellants
has
submitted,
there
were
general
meetings
of
the
shareholders.
That
can
be
seen
at
paragraph
17
of
these
Reasons
referring
to
a
unanimous
shareholders
agreement,
at
Tab
27
of
Exhibit
A-4,
which
is
a
1991
Annual
Report
to
the
Shareholders,
signed
by
the
Appellants
as
directors,
at
Tab
46
of
the
same
Exhibit,
stating
that
an
annual
meeting
was
held
on
August
26,
1993
and
at
Tabs
44
and
46
of
the
same
Exhibit
showing
the
comments
to
the
shareholders
prepared
by
Mr.
Parton
for
the
shareholders
annual
meeting.
Therefore,
it
was
known
by
the
totality
of
the
shareholders
that
the
Appellants
were
the
directors
and
that
the
number
of
directors
was
two.
No
objection
has
ever
been
raised
by
the
shareholders.
The
shareholders,
by
their
acquiescence,
could
be
considered
to
have
cured
the
irregularity
regarding
the
number
of
directors
on
the
board
and
their
appointment:
see
in
this
respect
pages
234
and
235
in
the
chapter
entitled
“Irregularities”
in
F.W.
Wegenast,
The
Law
of
Canadian
Companies
(Toronto:
Carswell,
1979).
It
would
appear
that
the
Appellants
could
be
considered
de
jure
directors.
They
surely
were
de
facto
directors.
Court
decisions
are
to
the
effect
that
de
facto
directors
bear
the
same
liability
as
de
jure
directors
regarding
outsiders.
I
will
quote
from
The
Law
of
Canadian
Companies,
supra,
at
pages
408
to
411
as
to
whom
are
de
facto
directors
and
what
is
their
responsibility:
De
Facto
Directors.
If
a
person
not
duly
elected
nevertheless
acts
as
a
director
he
may
under
certain
circumstances
be
regarded
as
a
de
facto
director.
Persons
assuming
to
act
as
directors
of
a
company
without
having
been
properly
elected,
or
a
board
not
duly
constituted,
because
too
many
or
too
few
were
elected
or
remained
in
office,
or
consisting
of
directors
who,
or
some
of
whom
have
held
on
after
the
expiry
of
their
term
of
office,...
...outsiders,
at
all
events,
are
entitled
to
assume
that
the
internal
proceedings
of
a
company
have
been
regular
and
that
those
who
purport
to
speak
and
act
for
the
company
have
been
duly
authorized.
...Between
the
company
and
persons
having
no
notice
to
the
contrary,
directors
de
facto
are
as
good
as
directors
de
jure,...
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,...
As
stated
above,
counsel
for
the
Appellants
relied
on
a
decision
of
this
Court
in
Wheeliker,
supra,
that
says
at
page
1114
that
although
they
may
have
been
de
facto
directors
at
common
law,
they
were
not
under
the
Companies
Act
and
should
not
be
held
vicariously
liable
under
section
227.1
of
the
Act.
It
is
difficult
for
me
to
understand
where
this
finding
comes
from
that
directors
are
de
facto
directors
at
common
law
and
not
under
the
statutory
acts.
If
I
look
at
the
sources
of
Company
law
set
out
by
Wegenast
in
The
Law
of
Canadian
Companies,
supra,
at
page
53,
I
see
that
the
sources
are
to
be
found:
Sources
of
Company
Law.
Generally
speaking
the
law
and
rules
governing
an
ordinary
commercial
company
are
to
be
found
in
(a)
the
statutory
provisions
under
which
the
company
was
incorporated
and
legislation
in
pari
materia
with
it,
(b)
the
charter,
or
other
constating
instrument
under
which
the
company
is
incorporated,
(c)
the
by-laws
of
the
company,
or
in
the
case
of
a
registered
company
its
articles
of
association,
and
(d)
general
principles
of
company
law
as
embodied
in
decisions
of
the
courts.
Judicial
interpretation
cannot
be
dissociated
from
the
statutory
acts
it
interprets.
Caselaw
or
jurisprudence
is
a
source
of
company
law,
it
is
not
distinct
from
it.
At
any
rate,
there
is
no
doubt
that
the
notion
of
de
facto
directors
is
specifically
contemplated
in
section
128
of
the
O.B.C.A.
Indeed
that
section
speaks
of
nothing
else
than
de
facto
directors.
Section
97
of
the
Nova
Scotia
Companies
Act
is
similar
to
section
128
of
the
O.B.C.A.
There
are
many
other
provisions
regarding
de
facto
directors
in
the
O.B.C.A.
I
therefore
cannot
follow
that
part
of
the
decision
of
this
Court
in
Wheeliker,
supra,
and
I
must
conclude
that
the
term
“director”
in
the
O.B.C.A.
includes
de
facto
directors
insofar
as
their
liability
to
outsiders
is
concerned.
The
Appellants
have
tried
to
exculpate
their
liability
in
putting
it
to
what
appears
to
be
known
in
English
law
as
“shadow
directors”,
although
this
notion
does
not
relieve
the
de
facto
directors
from
their
liability,
because
by
assuming
the
position
of
directors
they
have
assumed
the
obligations
and
duties
coming
with
this
function.
The
notion
of
shadow
directors
would
only
add
to
the
number
of
directors.
I
refer
to
Gower’s
Principles
of
Modern
Company
Law,
5th
ed.,
(Sweet
&
Maxwell,
1992)
at
pages
143
and
144:
De
Facto
and
Shadow
Directors
While,
de
jure,
people
cannot
be
directors
unless
they
have
been
properly
appointed,
they
may,
as
we
shall
see
later,
be
able
to
bind
the
company
although
they
have
not.
Moreover,
they
may
be
subject
to
liability
as
if
they
were
directors
because
they
have
assumed
that
position,
or
because
an
increasing
number
of
legislative
provisions
expressly
apply
not
only
to
directors,
but
also
to
“shadow
directors",
i.e.
persons
“in
accordance
with
whose
directions
or
instructions
the
directors
of
the
company
are
accustomed
to
act"
otherwise
than
only
because
“the
directors
act
on
advice
given
...
in
a
professional
capacity.”
Counsel
for
the
Appellants
suggested
that
the
Appellants
were
dupes
or
puppets
and
that
no
vicarious
liability
should
be
imposed
on
them.
With
hindsight,
that
may
be
how
the
Appellants’
behaviour
may
appear.
However,
when
they
chose
the
course
of
action
that
has
brought
this
unfortunate
assessment
this
is
not
what
they
thought
of
themselves
and
it
is
not
an
accurate
description
of
their
role
in
the
management
of
the
company.
The
Appellants
were
intelligent
persons
and
had
active
and
important
roles
in
the
Company.
There
is
no
evidence
that
they
acted
under
forcible
threat.
They
are
accountable
for
their
own
actions.
The
documentary
evidence
shows
that
the
Appellants’
memoranda
to
the
advisors
were
in
the
nature
of
those
of
executive
directors.
In
Gower’s,
supra,
at
page
158,
I
find
of
interest
the
distinction
made
between
the
executive
director
and
the
non-executive
director
as
follows:
Executive
and
Non-Executive
Directors
It
will
have
been
apparent
from
the
foregoing
that
directors
may
be
either
nonexecutive
or
executive.
The
former
are
directors
expected
to
do
little
or
nothing
other
than
to
attend
a
reasonable
number
of
board
meetings
and,
perhaps,
some
of
the
committees
that
the
board
may
establish.
As
such
they
will
be
modestly
rewarded
by
directors’
fees
resolved
upon
by
the
company
in
general
meeting.
Executive
directors
are
those
who,
in
addition
to
their
roles
as
directors
hold
some
executive
or
managerial
position
to
which,
as
we
have
seen,
they
are
appointed
by
the
board,
which
will
determine
their
emoluments
and
“perks”....
The
notion
of
an
executive
director
is
not
different
from
that
one
of
an
inside
director
as
analyzed
in
Soper
v.
R.
(1997),
97
D.T.C.
5407
(Fed.
C.A.)
at
page
5417:
At
the
same
time,
however,
it
is
difficult
to
deny
that
inside
directors,
meaning
those
involved
in
the
day-to-day
management
of
the
company
and
who
influence
the
conduct
of
its
business
affairs,
will
have
the
most
difficulty
in
establishing
the
due
diligence
defence.
For
such
individuals,
it
will
be
a
challenge
to
argue
convincingly
that,
despite
their
daily
role
in
corporate
management,
they
lacked
business
acumen
to
the
extent
that
that
factor
should
overtake
the
assumption
that
they
did
know,
or
ought
to
have
known,
of
both
remittance
requirements
and
any
problem
in
this
regard.
In
short,
inside
directors
will
face
a
significant
hurdle
when
arguing
that
the
subjective
element
of
the
standard
of
care
should
predominate
over
its
objective
aspect.
In
Merson
v.
Minister
of
National
Revenue
(1988),
89
D.T.C.
22
(T.C.C.),
Rip
J.
described
at
page
28
the
standard
of
reasonable
care
which
a
diligent
administrator
should
exercise
to
comply
with
the
requirements
of
subsection
227.1(3)
of
the
Act:
...
The
prudence
required
by
subsection
227.1(3)
in
the
exercise
of
care,
diligence
and
skill
is
different
from
that
required
by
a
director
performing
his
duties,
under
corporate
law,
notwithstanding
that
subsection
227.1(3)
and
subsection
122(1)(b)
of
the
Canada
Business
Corporation
Act,
for
example,
both
use
identical
words.
The
exercise
of
care,
diligence
and
skill
by
the
director
contemplated
by
subsection
227.1(3)
is
not
founded
on
the
director’s
obligations
to
the
corporation;
it
is
based
on
one
of
the
corporation’s
obligations
under
the
Act
and
the
failure
of
the
corporation
to
fulfil
such
obligation.
A
director
who
manages
a
business
is
expected
to
take
risks
to
increase
the
profitability
of
the
business
and
the
duties
of
care,
diligence
and
skill
are
measured
by
this
expectation.
The
degree
of
prudence
required
by
subsection
227.1
(3)
leaves
no
room
for
risk.
The
Appellants
were
two
persons
who
had
been
at
the
executive
level
in
business
before.
They
accepted
the
position
of
director,
with
a
substantial
remuneration
(the
remuneration
ceased
as
of
March
15,
1993),
of
a
corporation
whose
business
was
being
implemented,
a
business
that
required
a
great
deal
of
financial
resources
and
had
experienced
cash
flow
difficulties
from
the
start.
They
knew
of
the
obligations
of
a
company’s
director.
They
asked
to
be
insured
against
them.
However,
they
accepted
the
function
of
directors
without
any
written
indemnification.
They
were
taking
risks
but
they
thought
that
these
risks
were
surmountable.
It
is
evident
that
knowing
what
they
know
now,
they
would
not
have
taken
them.
The
risks
that
they
took
were
among
others
not
to
pay
the
entire
salary
of
the
workers.
They
paid
the
net
salary
to
the
employees
and
did
not
remit
the
other
portion
to
the
fiscal
authorities.
They
did
that
on
purpose.
They
were
honest
persons
who
acted
in
the
interest
of
the
corporation.
Sadly,
most
cases,
if
not
all,
of
directors’
liability
who
come
before
this
Court
concern
honest
persons
who
thought
that
they
could
overcome
the
financial
difficulties
they
were
encountering
by
making
the
minimum
disbursements
of
cash
they
could
to
maintain
the
business
afloat,
hoping
that
they
would
be
able
to
remit
the
source
deductions
at
a
later
time
when
quietness
would
have
resurfaced.
This
Court’s
jurisprudence
is
that
this
does
not
prevent
the
directors
to
be
exculpated
from
liabilities
under
paragraph
227.1(1)
of
the
Act.
It
is
a
provision
that
is
based
on
the
deliberate
intention
of
not
remitting
the
source
deductions
while
continuing
to
pay
the
net
portion
of
the
salaries.
The
evidence
in
these
appeals
did
not
reveal
anything
else.
Due
to
the
conclusions
that
I
have
set
out
above,
I
do
not
see
the
need
to
deal
with
the
issue
of
estoppel.
The
appeals
are
dismissed
with
costs
to
the
Respondent.
Appeal
dismissed.
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