Nagy v. MNR, 91 DTC 993, [1991] 2 CTC 2325 (TCC)

Dussault, T.C.J.:—These appeals were heard on common evidence. They are appeals from assessments issued by the respondent on May 5, 1987, under subsection 227(10) of the Income Tax Act, RJ .C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

The basis of the assessments is the directors' joint and several liability under subsection 227.1(1) of the Act for the failure of the corporation Nettoyeurs LaSalle Inc./LaSalle Cleaners Inc. to remit an amount of $22,325.13 represent- ing, according to paragraph 4(a) of the reply to the notice of appeal, "deductions at source for the months of June and July 1982, February and March 1984 and a difference for the 1984 year". [1]

At the beginning of the hearing both counsel agreed that these appeals would be disposed of on the sole issue of the time limitation under subsection 227.1(4) of the Act.

Summary of Facts

The facts put in evidence are fairly simple and straightforward. According to the testimony of Mr. Osama Nour, former comptroller of the company, and Mr. William Nagy Jr. and also on the basis of various documents filed with the. Court, they can be summarized as follows:

— Nettoyeurs LaSalle Inc./LaSalle Cleaners Inc. (the "company") was incorporated under the Companies Act, R.S.Q., c. C-38 and continued under Part 1A of that Act, August 30, 1983.

— At all material times, Mr. William Nagy Jr. and Mr. Louis Nagy Jr. were directors of the said company.

— For many years, the company had been in the business of wholesale dry cleaning and was operating that business during the period between 1982 and 1984.

— The company started experiencing financial difficulties in 1982 and even before due to increased competition in the dry cleaning business.

— On September 10, 1982, the company filed a proposal under the Bankruptcy Act, R.S.C. 1985, c. B-3 which was approved by the Court on October 26, 1982.

— Thereafter, the company continued to carry on its business on a very tight cash basis without being able to discharge any of its liabilities under the terms of the proposal except, according to Mr. William Nagy Jr., for one payment made to account for the trustee's fee.

— At the end of April 1984, as it was realized that the business could no longer compete and survive, it was decided, as between the appellants, to lay-off the remaining employees and simply close down the business.

— The dry cleaning equipment was left on site and later scrapped by the landlord. The corporate records and files were simply put in a box and left on the premises which were later destroyed by a fire.

— The appellants never resigned as directors of the company. They never had any meetings, signed any documents or correspondence or were involved in anything whatsoever with respect to the company or its business thereafter. In 1988, a letter from the Quebec government (L'inspecteur général des institutions financières — Direction générale de l'administration et des entreprises) addressed to Nettoyeurs LaSalle Inc., a/s Services corporatifs ADLAW, 2020, rue University, bureau 1235, Montréal, was received to the effect that the company had omitted to file its annual returns for 1985 to 1987. The demand to file same with the appropriate fees was never acted upon because, as Mr. William Nagy Jr. said in his testimony "I had nothing to do with the company anymore".

— At the time the company ceased its operations it owed around $100,000 to various creditors including suppliers, the bank, the federal government and other government agencies.

— The company never made an assignment in bankruptcy, no application to the Quebec Superior Court was ever made by any creditor to have the 1982 proposal annulled and no petition was ever filed for a receiving order against the company. There has never been any winding-up of the company either voluntarily or otherwise, nor was a receiver-manager ever appointed.

— No suits or proceedings, except the assessments now under appeal, have ever been undertaken by any of the company's creditors against the appellants personally.

— On November 19, 1986, a certificate for the amount of the company's liabilities, namely an amount of $22,325.13 was filed by the Minister of National Revenue and duly registered in the Federal Court of Canada. A writ of fieri facias was granted on November 21, 1986, and was returned with a report of non est inventus on December 12, 1986.

Analysis

Subsection 227.1(4) reads as follows:

No action or proceedings to recover any amount payable by a director of a corporation under subsection (1) shall be commenced more than two years after he last ceased to be a director of that corporation.

There is no doubt here that the company is still in existence and is not bankrupt although it ceased all its business operations in April 1984.

Counsel for the appellants nevertheless argued that, as the company became de facto bankrupt at that time, that the directors then ceased "in law" to hold their office. Alternatively, he argued that the decision to terminate the business amounted to a resignation since article 123.76 in fine of the Companies Act of Quebec does not require a written notice to that effect as does article 108 of the Canada Business Corporations Act, R.S.C 1985, c. C-44.

Counsel for the respondent argued essentially on the basis that the directors of the company never ceased to hold their office and consequently that the limitation period of subsection 227.1(4) of the Act is not applicable in the present case. He relied mainly on article 123.76 of the Companies Act which provides that:

Notwithstanding the expiry of his term, a director remains in office until he is reelected, replaced, or removed.

The cases referred to by both counsel to sustain their positions are not really applicable here because they refer to rather different factual situations. Some comments of the presiding judges are useful, however, in distinguishing the present case.

The case of Perri v. M.N.R., [1990] 1 C.T.C. 2071; 89 D.T.C. 723, involved a situation in which a receiver-manager was appointed by the Court on November 28, 1984, under section 109 of the Company Act of British Columbia (R.S.B.C. 1979, c. 59) before the resignation of the director which was made in writing on February 25, 1985. The legal effect of such an appointment on the power of the directors of the corporation is set forth in section 110 of the same Act which reads:

Where a receiver manager is appointed, the powers of the directors and officers of the corporation cease with respect to that part of the undertaking for which he is appointed until he is discharged.

Associate Chief Judge Christie, of this Court, commented on the situation in the following terms at page 2074 (D.T.C. 724-25):

Generally speaking legislation establishing limitation periods provide that actions or proceedings shall not be brought after the expiration of a stipulated period from the time “the right to do so arose" or “the cause of action arose". Basically these limitation periods are fixed relative to the time when the act or omission complained of occurred. The limitation period under subsection 227.1(4) does not relate to the time of the failure of the corporation to remit deductions which is what triggers a director's vicarious liability under subsection 227.1(1). Rather it relates to a period of time after which a director of a corporation ceases to be a director.

As I understand it, it is the intention or object of subsection 227.1(4) to fix a limitation period that runs from a time when an individual ceases to be in a position in law and in fact to exercise the powers of a director to rectify the failure of the corporation to deduct or remit or both. I regard that as being the correct meaning of the phrase “ceased to be a director" in subsection 227.1(4). To hold that those words in all circumstances mean that there must be a lapse of two years from the date an individual ceases to hold office as a director in accordance with the provisions of the relevant corporate legislation would in some instances, such as those under consideration, render the limitation period devoid of meaningful substance. What could the appellants do qua director in relation to Olympic's default after the receiver-manager was appointed? Nothing. As of that date their power in that capacity ceased by operation of section 110 of the Company Act. They were also then stripped of their powers as officers of Olympic under that section. It is clear from Mr. Drennan's evidence that after the appointment of Thorne Riddell Inc. as receiver-manager the role of the appellants respecting the hotel business was reduced to that of its employees under Drennan's direction.

In my opinion the appellants ceased to be directors of Olympic within the meaning of subsection 227.1(4) of the Act effective November 28, 1984, and are entitled to the benefit of the limitation period prescribed under that subsection. This being sufficient to dispose of the appeals, it is unnecessary to deal with the other two grounds of appeal.

The appeals are allowed with costs.

The case of Nantel v. M.N.R., [1990] 2 C.T.C. 2362; 90 D.T.C. 1702, is also interesting as it refers to a situation whereby a bankruptcy of a company in November 1985 was followed by what was accepted as a resignation of the directors in January 1986. In reaching her decision, Judge Lamarre Proulx made the following remarks on pages 2363-64 (D.T.C. 1703):

The appellants testified that they had resigned in January 1986. There was no document to support their testimony. Mr. Serge Nantel testified that he kept a record of the minutes and that, after the arrival of the receiver, who completely emptied the premises of the corporation, he never found it again. He said that this document, which was signed by the four directors, had been included in the record of the minutes. An employee of the trustee brought the documents in his possession and the record or minutes was not one of them. All the appellants testified that they had signed a document stating that they resigned. However, they heard the testimony of the other witnesses as appellants and were entitled to remain in the court. Mr. Nantel testified that at the time of the bankruptcy he had consulted counsel, who had advised him to resign as a director of the corporation. With some reluctance I admit that this document was signed.

I would perhaps have been more reluctant to accept the fact that the directors had resigned, had it not been for the total inaction of the appellants as directors. Their conduct was in accordance with the legal situation they described. Mr. Bricteux began full-time work for another company in January 1986. He called Mr. Nantel from time to time to find out what was happening. This was the extent of his activity with respect to the corporation. Mrs. Bricteux did not perform any activities. Mr. Nantel does not seem to have done anything other than to call the trustee from time to time to find out what was happening. Mrs. Nantel does not seem to have performed any activities with respect to the corporation. In fact, for all the appellants, the bankruptcy of the corporation meant the end of their activities as directors thereof.

I am of the opinion that the appellants ceased to be directors for the last time in January 1986 and that the assessments were, consequently, not correct in law, given the limitation period laid down in subsection 227.1(4) of the Act. The appeals are allowed with costs.

The case of Gilbert Pedeault v. M.N.R., [1991] 1 C.T.C. 2274; 91 D.T.C. 463, was referred to by counsel for the appellants in support of the proposition that the time limitation period of subsection 227.1(4) should start from the time a company in fact ceases all its operations and the directors are no longer acting as such. With respect, I do not think that the decision in that case goes that far. In that case, the directors were assessed for failure of the corporation to remit the deductions at source for the months of September, October and November 1982. As the company operated only from September 1982 to the end of November or beginning of December 1982 and as Mr. Pedneault signed a letter of resignation on December 15, 1982, one can see that the resignation of Mr. Pedneault almost coincided with the cessation of the company's operation. Moreover, there seems to have been a confusion at some point between the end of the corporate existence and the cessation of business operations. In that context, and with respect, I do not agree with the proposition that the time limitation period under subsection 227.1(4) of the Act should start from the time a company ceases its operations.

Finally, the decision in the case of lonnis Mavrikakis v. M.N.R., (90-48(IT)) as yet unreported) was referred to by counsel for the respondent. At page 4 of the English translation, Judge Lamarre Proulx commented on the effect of a bankruptcy in the following terms:

According to scholarly analysis and precedent, a corporation's bankruptcy does not terminate the mandate of the corporation’s directors. Its only effect is to reduce the directors' powers [1] . In the circumstances of this appeal, the appellant had not resigned and continued to act as a director of the corporation on a limited basis. I therefore conclude that the respondent's assessment was not prescribed.

The purpose of subsection 227.1(4) is to protect directors from indefinite exposure to collection proceedings in respect of liability under subsection 227.1(1). That protection would, as a practical matter, be diminished greatly if directors of a bankrupt corporation are by reason of vestigial powers which they hold after a bankruptcy to be treated as continuing in office until either they resign or the corporation is struck from the register. Few people in such circumstances would ever think of resigning and few bankrupt corporations ever pay their debts in full and are discharged. As a consequence in most cases the two-year period would not start to run until the time when the corporation is struck from the register for failure to file returns. I find it difficult to conceive that the construction for which the respondent contends was in the contemplation of the legislature. For the foregoing reasons I have concluded that the appellants last ceased to be directors of the company more than two years before the assessment were issued. The appeals will therefore be allowed with costs and the assessments of liability under section 227.1 of the Income Tax Act will be vacated.

I read those decisions as meaning that each situation is different and that, in interpreting the words "after he last ceased to be a director" in subsection 227.1(4) of the Act one has to look at whether there is some restriction to the general rule with respect to the exercise of the director's powers. Such a restriction might exist either under the applicable corporate legislation or by the operation of some other statute, like the Bankruptcy Act which would have the effect of depriving a director of the ability to exercise the powers normally granted to him under the governing corporate Act. If such a restriction is found to exist, then its practical effect has to be ascertained by examining the circumstances of each case.

In the present case, such a restriction was not shown to exist. The situation is different and should be treated differently. We are not here in a situation where directors have been stripped of power or have been deprived of their exercise by reason of receivership or bankruptcy. The directors simply decided to walk out and leave everyone and everything behind, including the debts of the company. No one ever removed any power from them by reason of a legal action or proceedings against the company.

If one is to read the words of an Act “in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament” according to the "modern rule” of statutory construction laid down by the Supreme Court of Canada, one is not to vary the words used by Parliament or add some that Parliament has not seen fit to use. The cessation of all business operations by a company does not by itself deprive the directors of any of the powers granted to them by law. In my opinion, it does not as such release them of their obligations and responsibilities either. It is one thing to cease to be a director and quite another to decide to cease to act as one following the end of business operations.

Section 123.76 of the Companies Act provides that:

[Continuance in office]

Notwithstanding the expiry of his term, a director remains in office until he is reelected, replaced, or removed.

[Resignation]

A director may resign from office by giving notice to that effect.

Section 123.81 of the same Act reads:

[Notice]

Within fifteen days after a change is made to the composition of the board of directors, the company must give notice containing the information contemplated in paragraph 1 of section 123.14 to the Inspector General, and he shall register it.

The information contemplated in paragraph 1 of section 123.14 is personal information concerning the directors: name, surname, address, etc.

As one can see, a resignation is not to be presumed. Notices to that effect must be given.

Finally, I must reiterate the third paragraph of section 123.31 of the same Act to the effect that:

. . . Third persons may presume that

(3) the directors and officers of the company validly hold office and lawfully exercise the powers arising therefrom;

One cannot claim the privileges of operating a business through an incorporated company and later completely ignore the provisions and requirements of the governing Act.

In the present case, no resignation was ever tendered by the directors and no notice was ever given to the company or to the Inspector General as required by sections 123.76 and 123.81 of the Companies Act.

I thus conclude that the appellants have not ceased to be directors of Nettoyeurs LaSalle Inc./LaSalle Cleaners Inc. and thus that the proceedings against them under subsections 227.1(1) and (10) of the Act are not prescribed by virtue of subsection 227.1(4) of the Act.

The appeals are dismissed.

Appeals dismissed.