Date:
20140814
Docket:
2012-4927(GST)I
BETWEEN:
SPIROS FENGOS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
EDITED VERSION OF TRANSCRIPT OF REASONS FOR
JUDGMENT
(delivered from
the bench on July 17, 2014, at Montréal, Quebec)
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APPEARANCES:
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|
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Counsel for
the appellant:
|
Billy Katelanos
|
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Counsel for
the respondent:
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Huseyin Akyol
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Court registrar:
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Pierre Limoges
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International
Reporting Inc.
41-5450 Canotek Drive
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1-800-899-0006
— Hearing started on July 17, 2014 at 9:55 a.m.
[1]
Mr. Limoges: Reading of the
judgment in docket 2012-4927(GST)I between Spiros Fengos and Her Majesty
the Queen. Present this
morning are Billy Katelanos, for the appellant, and Huseyin Akyol,
for the respondent.
Jorré J.
[2]
Good morning. I will now deliver my reasons in the
appeal of Spiros Fengos. The appellant is
appealing from an assessment dated January 12, 2012, which was issued
under section 323 of the Excise Tax Act. Section 323 imposes solidary liability on a director
of a corporation for that corporation’s failure to remit an amount of net tax.
The amount of the assessment including tax and
penalties is less than $3,000.
[3]
It is not disputed that the
corporation Levisted inc. defaulted on remitting net tax amounts for the period
from January 1 to December 31, 2006. The amounts in question were due on April 2, 2007. It is not disputed that the appellant was a director of Levisted
inc., a corporation incorporated under the Quebec Companies Act.
[4]
The only issue is whether
the appellant can avail himself of the defence set out at subsection 323(3). That subsection reads as follows:
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.
[5]
I also note that the first
paragraph of article 322 of the Civil Code of Québec imposes the
following obligation on directors: “A director shall act with prudence and
diligence”.
[6]
The appellant is a
pharmacist by trade; he obtained his bachelor’s degree in biology in 1985 and
bachelor’s degree in pharmacy in 1989. He also obtained a diploma in
administration in 1989. As
soon as he was registered with the Ordre des pharmaciens, he became the owner
of a pharmacy. Later, he acquired other pharmacies, and at one point he owned
19 pharmacies.
[7]
The period between 2005 and
2007 was very difficult for the appellant. Both his parents were very ill, his marriage was failing,
and he eventually got divorced. During that
time, he was also very active in his community.
[8]
Evidently, he had all his
responsibilities with the pharmacies, and several of the pharmacies were having
financial problems. Although
other pharmacies were doing well, overall the pharmacies had serious problems,
because at the time a pharmacist could not incorporate his or her pharmacy, and
those 19 pharmacies (there may have been less than 19 pharmacies in June 2006)
were not incorporated.
[9]
Following these problems, on
June 21, 2006, the appellant filed a notice of intent to file a proposal in
bankruptcy. An intermediary
receiver was appointed the same day. The proposal dated October 18, 2006,
mandated the intermediary receiver to sell off all of the appellant’s assets
including his shares in Levisted inc. The proposal was accepted and its
execution was completed in July 2008.
[10]
According to the appellant,
the trustee told him that he could no longer manage his property after he had
given the notice of intent.
[11]
The fact that the appellant’s
shares in Levisted were part of the proposal has no legal effect on the fact
that the appellant held the office of director of Levisted.
[12]
The appellant testified that
he became a shareholder and director of Levisted as a favour to Gérald Lévis. In the past, the appellant had purchased
non‑pharmaceutical products from a company that at the time belonged to
Mr. Lévis. Mr. Lévis’s former company
had gone bankrupt, and Mr. Lévis wanted to start a new company in which he
would work with his two sons.
[13]
The appellant helped
Mr. Lévis in two ways. On
the one hand, he became a shareholder by buying treasury shares of the new
company for $25,000 at the end of 2002. On the
other hand, he guaranteed a $50,000 line of credit just over a year later.
He was hoping to eventually make a little money from
his investment; he also became a director of Levisted at the time.
[14]
The appellant’s testimony
was very clear that he was inactive as a director. He had never attended a board of directors’ meeting. He had
never asked to see financial statements or reports. He did not ask questions. He
did not receive reports or statements of account from the bank with regard to
the line of credit or to anything else. He
received a financial report from the company, if I understood the evidence
correctly, for the company’s first fiscal year. There
is no evidence that he asked what was happening with GST remittances.
[15]
Mr. Lévis came to see the
appellant every two or three months, but Mr. Lévis’s visits were as a
supplier for the appellant’s pharmacies. When the appellant saw Mr. Lévis, their conversations
were very general and informal, and he concluded that everything was going well
with the company.
[16]
After June 21, 2006, and
before 2009, the appellant’s involvement as a director of Levisted did not
increase; he received no communications regarding the company until the bank
asked him to honour his guarantee.
Analysis
[17]
In these circumstances, did
the appellant exercise the degree of care, diligence and skill to prevent a
failure to remit the net tax that a reasonably prudent person would have
exercised in comparable circumstances?
[18]
The appellant claims that he is an outside
director and that he only became liable when he knew that the business was
having difficulties. According to the appellant, because he was not informed of
the company’s difficulties, the consequence is that he had no obligation to act
and that he is not liable as a director.
[19]
The appellant was not involved day to day in the
company’s operations, and I agree that he was an outside director. However, I
have carefully read the case law on which the appellant is relying, and I
cannot use the interpretation proposed by the appellant. In this case, not only
was the appellant not informed, but he also made no effort to be informed. That
does not constitute due diligence.
[20]
One of the excerpts the appellant cited is from
paragraph 5 of the Federal Court of Appeal decision in Borduas v.
Canada, 2010 FCA 102. I quote:
. . . As an outside director, the appellant would only be liable if he
knew or should have known that the corporation was having difficulty remitting
its taxes; hence his interest in being characterized as such.
[21]
I emphasize that the words “or should have known”
were included in this excerpt.
[22]
Although the appellant was not aware of the
company’s financial problems, it is clear that a person cannot claim the
exemption set out at subsection 323(3) if that person does nothing as a
director. It is also clear that the onus is on the appellant to show that he
fulfilled the requirements of the exemption.
[23]
But I come back to the obligation to do something,
and not simply do nothing. This is evident first from the wording itself of
subsection 323(3). The subsection states that the person must exercise the degree of care, diligence and skill that a
reasonably prudent person would have exercised in comparable circumstances. A
reasonably prudent person is not a person who does not ask questions and who
never tries to find out what is happening with regard to remitting net tax.
Therefore, he or she must do something because, if one is uniformed, it is
impossible to prevent a failure.
[24]
This can also be seen in the case law, and I
will cite some excerpts from the Federal Court of Appeal decision in Canada v.
Buckingham, 2011 FCA 142. Although that decision concerns an inside
director, it is clear that the decision written by Justice Mainville
states principles that apply generally to all directors, particularly, at the
end of paragraph 33:
. . . The
directors must thus establish that they exercised the degree of care, diligence
and skill required “to prevent the failure”. The focus of these provisions is
clearly on the prevention of failures to remit.
[25]
Then, at the end of paragraph 38:
.
. . Consequently, a person who is appointed as a director must carry out the
duties of that function on an active basis and will not be allowed to defend a
claim for malfeasance in the discharge of his or her duties by relying on his
or her own inaction: . . .
[26]
In addition, at the end of
paragraph 40, the following is stated:
.
. . In order to rely on these defences, a director must thus establish that he
turned his attention to the required remittances and that he exercised his duty
of care, diligence and skill with a view to preventing a failure by the
corporation to remit the concerned amounts.
[27]
This can also be seen
further down in the decision at paragraph 52. The Court of Appeal stated that
liability is not absolute, but, it says, and I quote from part of the
paragraph:
.
. . What is required is that the directors establish that they were
specifically concerned with the tax remittances and that they exercised their
duty of care, diligence and skill with a view to preventing a failure by the
corporation to remit the concerned amounts.
[28]
I acknowledge that at
paragraph 39 of the judgment, the Court of Appeal states the following:
An objective standard does
not however entail that the particular circumstances of a director are to be
ignored. These circumstances must be taken into account, but must be considered
against an objective “reasonably prudent person” standard. . . .
[29]
Further down in the same
paragraph, the Court of Appeal cites an excerpt from a Supreme Court of Canada
decision in Peoples Department Stores Inc.(Trustee of) v. Wise, 2004 SCC
68.
[30]
But what does it mean that “circumstances
must be taken into account”? It
is true that an outside director is in a different situation from the inside
director, and we must take that into account. But
this is not to say that the outside director can make no effort to stay
informed. Because, as I just read, those
circumstances “must be considered against an objective “reasonably prudent person”
standard”.
[31]
And a reasonably prudent
person who wants to avoid a failure to remit is not completely uninterested in
operations.
[32]
What does this mean in
practice? This might mean,
for example, that there may be circumstances where the liability of an external
director would be incurred at a later date than that of an internal director.
[33]
For instance, an internal
director who is the company’s president, who is there every day, might learn
that there are problems that may potentially lead to the company’s being unable
to pay its remittances earlier than an external director would. And it may be understandable that, while
still being diligent, an external director would learn of this later and would
act later. Therefore, the external director’s
liability would begin on a date that is later than that on which the internal
director’s liability began. And this might
have consequences for the amount for which he or she might be liable. That is what it means to take circumstances into account.
[34]
There is a sentence in a
decision of the Quebec Court of Appeal, which I believe reflects this. That decision is in a rather different
context; it is Wightman c. Widdrington (Succession de Widdrington), 2013
QCCA 1187, a decision of the Quebec Court of Appeal. In that decision, the Court of Appeal examines the law with
respect to the duties of directors at paragraphs 392 to 407 of the decision.
[35]
Just after reviewing Buckingham,
the Court of Appeal says several things at paragraphs 400 to 402; I will not
read them all, but paragraph 400 reflects what I just explained well:
[Translation]
Thus,
an inside director must be compared to a reasonably prudent inside director,
while an outside director must be compared to a reasonably prudent outside
director
[36]
And in both cases, the director
must do something.
[37]
Thus, based on these facts,
no efforts were made by a reasonably prudent person who is an outside director
to follow Levisted’s remittances, and I do not see how I could find that there
was due diligence. The result
is that I must dismiss the appeal.
— The hearing
was adjourned at 9:52 a.m.
Translation
certified true
On this 28th day
of November 2014
Margarita
Gorbounova, Translator
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