Fraser H. Edison, Clarence J. Dwyer, Donald I. Clarke and Robert G. Giannou v. Her Majesty the Queen, [1995] 2 CTC 2470

Rip J.T.C.C.:-Fraser H. Edison (’’Edison"), Clarence J. Dwyer ("Dwyer"), Donald I. Clarke ("Clarke") and Robert G. Giannou ("Giannou") appeal assessments, notices of which were mailed on November 21, 1989, pursuant to subsection 228.1(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for amounts of unpaid deductions, interest and penalties ("source deductions") payable by Easteel Industries (1984) Limited. Each was a director at various times Easteel ought to have remitted but did not remit, source deductions to the Receiver General for Canada in accordance with subsection 153(1) of the Act. [1] The appeals were filed before 1991. The appellants were also assessed pursuant to analogous provisions of the Income Tax Act (Newfoundland), the Canada Pension Plan and the Unemployment Insurance Act; however these assessments are not before me.

The appeals were heard on common evidence.

Appellants’ Evidence

In early 1984, Metalcraft Ltd. (’’Metalcraft”), a corporation controlled by Edison, Dwyer and Clarke, purchased the business assets of Easteel Industries Limited and merged the business operations of both corporations. (A holding company owned equally by Edison, Dwyer and Clarke a year earlier purchased 60% of the shares of Metalcraft from a Mr. Lambe.) Metalcraft changed its corporate name to Easteel Industries (1984) Ltd. ("Easteel" or "Company"). Easteel carried on the business of steel fabrication and erection of steel structures as well as the fabrication of storage and oil tanks and steel containers.

At first the business proceeded well but problems soon became apparent. A Newfoundland Retail Sales Tax audit of the business carried on by Metalcraft resulted in an assessment to Easteel of approximately $150,000. By late 1984 work dried up, said Dwyer. Soon thereafter Lambe who had continued to manage the business "left suddenly after tough discussions" and turned over his shares in the company to the appellants’ holding company for one dollar. No one was named to replace Lambe as a director of Easteel so that at the end of 1984 the directors of Easteel were Edison, Dwyer and Clarke.

Dwyer laid the blame for Easteel’s inactivity at the end of 1984 to market conditions and bank restrictions "on our ability to take on new work". The company failed to remit source deductions for the payrolls of December 1984, January 1985 and February 1985; these payments were due on the 15 day of the month following the month the employees were paid, that is, the 15 of January, February and March 1985 respectively.

Meetings of directors of Easteel were held regularly on an informal basis. Clarke, who resided in Montreal, participated by telephone conference call. Unaudited financial statements were prepared monthly. The company also employed a comptroller who was responsible for finances and accounting.

In late 1984 Easteel’s banker, the Mercantile Bank of Canada, became concerned about Easteel’s financial position and its officials had numerous discussions with Dwyer.

At the request of — and I assume the direction of — the Mercantile Bank of Canada, Dwyer wrote the accounting firm of Thorne Riddell on January 14, 1985 asking that firm "to make a full and complete investigation of certain aspects of the business affairs of the company with a view to reporting to the Mercantile Bank of Canada concerning the same". Dwyer described the investigation as a "look see". Thorne was engaged and paid by Easteel. The investigation was conducted by Brian Vallis, C.A., who entered the company’s premises on January 14. Vallis was given full access to the company’s books, records and staff. He submitted a report to the bank on January 31, 1985. As a result of the report a meeting was held on February 14, 1985 with Dwyer, Easteel’s accountants and representatives from Thorne Riddell Inc., an affiliate of Thorne Riddell. Dwyer was informed the bank had requested Thorne Riddell Inc. to enter the premises of the company to act in a quasi management capacity. Thorne Riddell Inc. was to maintain control of all aspects of receipts and disbursements, sales, purchases, and other general management activities. The next day Vallis confirmed the bank’s request by letter.

Dwyer described the action taken by the bank as a "soft receivership". Dwyer said Vallis monitored "what was happening" since January 15, 1985. According to the mandate given to Thorne Riddell Inc., Thorne Riddell Inc. and Company management were to agree "upon any payments to be made on pre February 14, 1985 payable, if any. All cheques and payments of accounts payable on other services to be purchased on a cash basis will be approved by Thorne Riddell Inc. prior to their release". Dwyer testified that the company’s bank account was frozen so Vallis had to approve all cheques. No cheques were prepared for Vallis’ approval relating to amounts due prior to February 14, the "cut off date". In reply to a question put by the respondent’s counsel as to whether management suggested to Thorne Riddell Inc. that source deductions belonged to the Crown, Dwyer replied: "I don’t think I’d have to tell them that". Cheques were made out to Revenue Canada for current source deductions, "but not past remittances". In cross-examination Dwyer said he asked Vallis, but could not recall when he asked, to sign cheques for source deductions due December 15, 1984 and January 15, 1985. [2]

Dwyer acknowledged he was aware of his duty to remit source deductions "and in most cases I did so". Easteel failed only twice to remit. He stated he exercised his statutory duty in giving Revenue Canada promissory notes. The notes will be described later. In his view he "took extraordinary steps to save the company and satisfy Revenue Canada. We did everything we could to keep the company alive...."

By late January 1985, Dwyer said he knew Easteel had not paid source deductions with respect to the December 1984 payroll. He said he was in touch with Revenue Canada with respect to future remissions for 1985.

"Very soon after Vallis showed up", Dwyer recalled, "we knew we’d have to make a proposal" under the Bankruptcy Act, R.S.C. 1985, c. B-3. It was obvious then, according to Dwyer, that Easteel would have to shut down or be saved by "severely reorganizing and restructuring" with a proposal in bankruptcy. Several months were devoted to negotiating terms of the proposal with creditors, including Revenue Canada.

A list of creditors and amounts payable as at February 14, 1985 was prepared. The Mercantile Bank of Canada was the sole secured creditor. Revenue Canada was a preferred creditor, as defined by section 107 of the Bankruptcy Act, as it read in 1985. Easteel was indebted to Revenue Canada for failure to remit $163,529.56.

Easteel agreed to execute two promissory notes to Revenue Canada representing source deductions arrears as of February 14, 1985. The two notes were dated August 5, 1985, were each in the amount of $81,764.78 and were without interest. One note was payable in equal monthly instalments of $2,271.25, the first instalment to be due and payable on July 1, 1987, with subsequent payments consecutively due and payable on the first day of each month thereafter in 35 equal instalments. The second note was due and payable on demand on or after July 1, 1988. Attached to the second note only was an agreement between the Receiver General of Canada and Easteel, which provided, amongst other things,

1. Receiver General for Canada at the District Office of Revenue Canada Taxation agrees not to exercise a demand under the promissory note except in accordance with the provisions of this agreement.

3. The demand note will not be called until July 1, 1988, except in the event of this company’s bankruptcy.

7. If payments are not made as required, this demand note will be called and all amounts owing will be immediately due and payable.

8. Notwithstanding any of the matters agreed to herein, if the company is adjudged bankrupt, Receiver General for Canada at the District Office of Revenue Canada Taxation will file a Proof of Claim in the usual manner and will be relying on its status as a preferred creditor.

Dwyer stated it was clear from the discussions that Revenue Canada insisted future source deductions be paid on the fifteenth day of each month, as provided by the Act. He said Easteel then established a procedure whereby cheques payable to the Receiver General were prepared for his signature and then hand delivered to Revenue Canada. Revenue Canada would telephone monthly to ensure the payments were delivered. Sometimes Revenue Canada "pushed" for payments.

After the proposal was approved by the Supreme Court of Newfoundland on August 6, 1985 "things got better", Dwyer said, and the "business was close to break even".

Easteel’s relations with labour over the years "was not the best", Dwyer noted. At the insistence of the bank on July 5, 1985, Easteel had engaged the services of Robert Giannou’s corporation, Corporate Services Ltd., to help assist the company. Giannou, a labour relations specialist, had helped the company renegotiate its collective agreement. Giannou was elected a director the same day.

At the same time Easteel was working with the Canadian Employment and Immigration Commission ("CEIC") to make its plant a more efficient work place. An industrial adjustment committee, a joint committee of labour and management, had been formed to this end. Giannou was chair of the committee and as representative of Easteel reported to the directors.

As director Giannou had nothing to do with financial matters, said Dwyer, although he was "not precluded from financial matters". "We three directors dealt with financial matters and we would ask Giannou to excuse himself (from meetings) because he had no financial interest in the company." Giannou was paid for his services through his corporation. His fee came from CEIC funding. His role was labour advisor, but he also performed other services.

One of Giannou’s jobs was to recruit staff. In 1985, Bob Johnson, a chartered accountant, was hired as comptroller. Johnson was responsible for sending the source deductions to Revenue Canada, preparing payroll and cheques. He worked at Easteel until mid 1987. Giannou was also instrumental in hiring a general manager in charge of plant operations on a temporary basis.

Giannou’s Evidence

Giannou testified on his own behalf and generally confirmed Dwyer’s evidence that he had nothing to do with financial matters. He said his corporation, Corporate Services Ltd., provides labour relations consulting services to small and medium size businesses in Atlantic Canada. Giannou said he was approached by Edison in March 1985 to assist Easteel. He met with the Mercantile Bank of Canada and Edison and "prepared objectives" which were approved by the bank.

As a result of Giannou’s recommendations and assistance Easteel had successfully renegotiated a collective agreement to reduce costs. The agreement was signed at the end of May 1985. Giannou testified the union respected his efforts and he was asked to chair the industrial adjustment committee.

The employees also put pressure on Dwyer, Giannou testified, "to put me in a senior position with the company...so that the employees felt they were dealing with a senior person". When Giannou was elected to the board of directors of Easteel on July 1985 he took no steps to identify his responsibilities as director. He "believed in my mind I was director for a single purpose... labour relations" and to satisfy the employees’ request. He believed that since he was not a shareholder he could gain no benefit as director.

At meetings of directors, Giannou said, he reported on progress of train ing programs and outstanding grievances. Giannou recalled he was told by Edison financial matters were "none of my business". After discussions with the bank manager in August 1985, Giannou expressed to the directors the need for a "proper" board with "proper terms of reference". He discussed his proposal with Clarke and Dwyer but it was rejected. Edison told him, he recalled, "to mind [my] own business". Giannou insisted he had nothing to do with finances and "was quite content to restrict [my] activity to labour (matters)". Giannou described directors’ meetings as "operational management meetings"; accounts payable and accounts receivable were not discussed.

Giannou explained he helped the general manager operate the plant and, as a result was aware of ongoing contracts, work rates and progress of each contract.

Giannou testified he never inquired whether a system of withholding and remitting tax and other statutory amounts existed at Easteel or if it worked. He was aware source deductions had been made because from time to time, when an employee had a complaint, he would see a pay stub. Johnson had mentioned to him the procedure in preparing and delivering source deduction cheques to Revenue Canada but he was not aware a problem existed. That was not his priority.

Giannou also testified that, except for a financial statement when Easteel was "restructuring" in 1985, he had never seen a financial statement of Easteel. He also stated he had "no idea what signing authority" for cheques was at Easteel. He also felt his presence was not wanted on various occasions when Edison, Clarke and Dwyer got together. It was "obvious topics [were] to be discussed that were not for you".

Giannou recalled that in December 1987 Dwyer informed him that Easteel was told that as result of a strike at Easteel, the company need no longer tender on contracts. He said his "first inkling of trouble" at Easteel was at a breakfast meeting in December 1987 with bank officials and directors of the company.

Giannou had never been a director of a corporation before, except for his own corporation. He testified he was not aware of the liability of a director under the Act and other statutes. "In my mind [there is] a difference between a director-shareholder and a non shareholder-director [appointed] for expertise in labour... I had no financial stake if the company succeeds or not...."

The Strike

Although Easteel had no profit in 1986, "the company was on an even keel", stated Dwyer, and made regular payments to the Receiver General. Easteel’s collective agreement was due to expire in April 1987. According to Dwyer, despite good relations with employees "the union refused to renew the contract and made severe demands". Negotiations were "tough", Dwyer recalled, and on June 15, 1987 the workers went out on strike. The strike was "sudden", said Dwyer, and picketing was "very aggressive". The company had to seek injunctive relief from the Court. Supervisory personnel attempted to continue operations but could not keep up with the work. Replacement labour was hired. Incidents took place. Police protection was provided to the replacement workers. The union, according to Dwyer, pressured Easteel’s clients not to contract with Easteel.

By late summer of 1987 business improved and the fall financial statement reported a "slight profit". However Easteel soon lost a major contract at Memorial University and smaller customers began to shy away. The bank originally supported the company’s efforts to continue operations during the strike but soon began to get nervous, said Dwyer. [The Mercantile Bank of Canada since had been acquired by the National Bank.] Easteel closed down for the Christmas season. Negotiations with the union were attempted but failed. Finally on February 3, 1988 Easteel received the necessary ten days formal notice of default from the bank under the terms of its loan. On February 5, 1988 Easteel waived its right to formal notice by the bank and consented to bank taking immediate steps to enforce its security. A Receiver-Manager was appointed to take possession of Easteel’s assets on February 5. Dwyer helped prepare a press release and then left Easteel’s premises on that day. The company was petitioned into bankruptcy on March 17, 1988.

Dwyer testified that when the strike started he contacted Revenue Canada and the company’s major suppliers to advise of the situation and the company’s attempt to continue operations. Revenue Canada agreed to defer payments on the first promissory note until operations returned to normal as long as current remittances were made on a timely basis. Source deduction payments were made, although some were late, according to Dwyer. The witness for Revenue Canada, Mr. March, disputed this statement: remittances were not made as required and arrangements had to be made for payments of arrears. Easteel agreed to pay $71,500 of the current arrears of $91,225.10 by October 2, 1987; the balance, $19,700 plus all outstanding interest on current arrears would be paid by October 9, 1987. Arrears on the first promissory note, plus the payment due for October 1987 were to be paid by October 15 and future payments would be kept current. By October 21, 1987, the arrears were paid. However Easteel failed to make its remittance for October’s payroll.

Respondent’s Evidence

Dudley March, who worked in the Source Deductions Section for Revenue Canada and at time of trial worked in the Department’s Collections Section, testified for the respondent. Easteel first came to his attention in his work on February 27, 1985 when he was advised Easteel’s remittance for December 1984 payroll period was returned for insufficient funds ("NSF"). By May 27, 1985 he had been advised of a "soft receivership" and on that day first discussed the proposal with Vallis and Dwyer.

The April 1985 remittance for source deductions had been remitted by the time the meeting was held. The May 1985 remittance was returned because of a "stop payment" and the payment for July 1985 was made in September 1985. March said he attempted through Vallis and Dwyer to have Easteel pay the source deductions. Finally, after numerous discussions with Vallis, Dwyer and Johnson, and threats of legal action, these arrears were paid. However subsequent remittances were frequently late.

March had no direct involvement with Easteel between December 1985 and early 1988. However in September 1987, he telephoned Easteel requesting payment for July. He also started to request payments on the promissory note. According to March, it was Revenue Canada that initiated contact with Dwyer and not Dwyer with him, as suggested by Dwyer. Revenue Canada was aware of the strike and Dwyer asked for delays in mailing payment "until things settled down". Some payments had been made voluntarily, March acknowledged, but eventually Revenue Canada delivered a letter requiring payment. This led to the agreement of October 1987. Revenue Canada filed a proof of claim when Easteel became bankrupt.

Statutory Provisions

Every employer paying at any time in a taxation year salary or wages or other remuneration is to deduct or withhold from the payment an amount determined by regulation and remit that amount to the Receiver General of Canada on account of the payee’s tax for the year: subsection 153(1). Subsection 227.1(1) provides that:

227.1(1) Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto.

However

227.1(3) A director is not liable for a failure under subsection (1) where he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances: subsection 227.1(3)

Parties’ Positions

The appellants say they exercised the degree of care, diligence and skill to prevent the failures that a reasonably prudent reason would have exercised in comparable circumstances.

The appellants also argue that Revenue Canada cannot renege on the promissory notes which, in their view, were entered into as settlement of the earlier unremitted amounts for which Easteel had been assessed. Revenue Canada willingly entered into such agreement and is estopped from taking any action against the appellants under the Act. In any event the appellants submitted that they cannot be liable for any failure to meet Easteel’s obligations pursuant to the promissory notes not due until after February 5, 1988 when the Receiver-Manager was appointed.

Appellants’ counsel argued that the appellants ought not be held liable for amounts assessed with respect to "adjustments" to previous assessments. In most cases these assessments result from clerical errors of Easteel staff and it could not have been contemplated by Parliament that directors be liable for such errors.

Counsel also submitted that Giannou is not liable since he was a director of Easteel for a specific purpose, that of labour advisor, and he had no responsibility for financial matters in general and source deductions in particular.

The respondent, on the other hand, argues that the appellants did not exercise the required degree of care, diligence and skill to prevent the failure of Easteel to remit the source deductions as and when required to do so by the Act. He also says that he did not accept the promissory notes in full satisfaction of the unremitted source deductions but only as security for the payment thereof.

Appellants

Prior to 1985, appellant’s counsel stated, Easteel had paid all source deductions. Indeed, counsel added, the failure to pay the source deductions on January 15, 1985 was the first time since Edison, Clarke and Dwyer were in the steel business that a company of theirs defaulted in making a payment. In fact a cheque was sent to Revenue Canada but was returned "NSF" due to severe financial difficulties beyond the control of the directors. Financial difficulties of the company so concerned its banker that the latter requested Thorne Riddell Inc. to investigate Easteel. From January 14, 1985, counsel said, a representative of Thorne Riddell Inc., Vallis, was involved "to a great extent" with the affairs of Easteel. The company was no longer in control of its own situation, counsel declared.

The failure by Dwyer to prepare cheques for the Receiver General after February 1985, that is, during the "soft receivership", counsel suggested, is not significant. Why do so, he asked, when Thorne Riddell Inc. said they would not approve the cheques. Directors, counsel said, need not make an issue of this, that is, the payment to the Receiver General every month. It was Clear Vallis would not approve payment.

Counsel for the appellants insisted his clients did everything possible to have Easteel remit the source deductions during the period February 1985 to August 6, 1985, when the proposal was approved by the Court. During this period the federal and provincial governments, [3] as well as the company’s directors, were at risk and "got together for the agreement", including the promissory notes.

The promissory notes did not provide for interest. Appellants’ counsel argued that by virtue of the agreement attached to the second promissory note Revenue Canada agreed to waive interest and therefore amounts of interest should be deducted from the assessments. Since there was no interest on the principal amounts of the notes after February 14, 1985 counsel concluded that interest was waived.

The amount represented by the notes was the amount owing by Easteel to Revenue Canada on February 14, 1985. The acceptance of the notes was a "complete settlement" by Revenue Canada, counsel asserted, and took the matter outside the provisions of the Act. Also, the making and acceptance of the notes was not part of the proposal. The latter submission is vital to the appellants’ case since claims of creditors under a proposal are, in the event of the debtor’s subsequent bankruptcy, proveable in the bankruptcy: subsection 95(5) [now subsection 122(1)]. Counsel says the Minister agreed to defer payments of the amounts represented by the promissory notes.

Counsel admitted that payments on the first note due in June, July and September 1987 were late due to the strike. Once the arrears were paid off in October, payments were regular.

Counsel submitted I look at what the directors did during the relevant period in light of commercial reality. In his view the directors did all they should have or could have done. The directors were not obligated to do what they did, that is, to work on a proposal. Something, counsel said, compelled the bank, Revenue Canada and the shareholders to invest more money in the operations.

In Hadad v. Canada, [1994] 2 C.T.C. 2214, 94 D.T.C. 1848, the evidence led to the conclusion that the fundamental reason for the corporation’s failure to discharge its Part VIII tax liability was a decline in the price of oil and not a failure by the taxpayers, as directors, to exercise the degree of diligence to prevent such failure. Counsel submits that because of Easteel’s deteriorating financial situation in January 1985 the company was genuinely prevented from making payment, notwithstanding the diligence of the directors. Outside forces, catastrophic circumstances, led to the company’s failure to remit, counsel claimed.

The powers of directors were removed from the appellants when the Receiver Manager took control of the company’s assets on February 5, 1988. At the time Easteel was current with respect to payments on the first note and the amount on the second note had not yet come due. On February 5, 1988 the appellants were no longer directors; they were no longer jointly and severally liable with the company. Indeed, counsel suggested, the appellants were freed of their statutory liability once the Minister accepted the promissory notes.

Counsel submitted that Giannou was in a "unique position" as director. He was chair of a joint labour management committee and labour representatives desired his presence on the board of directors. He looked after labour matters exclusively and did not participate in daily management. Giannou was not aware of his statutory obligations as director. He was not an officer of the company.

While Giannou was not a passive director nor a puppet as Mme Levesque was in Lévesque v. M.N.R., [1992] 1 C.T.C. 2722, 92 D.T.C. 1818, he had a specific role to play at Easteel which role was directed to his expertise, not unlike the appellants in Davies v. Canada, [1994] 1 C.T.C. 2744, 94 D.T.C. 1716.

Respondent

Respondent’s counsel conceded that Giannou first became a director on July 5, 1985 and is therefore not liable for defaults by Easteel prior to that date.

Counsel submits that Giannou was wilfully blind to what transpired at Easteel while a director. He failed to ask questions or even inquire as to the duties and responsibilities of director. Giannou simply did not know what his role was as director. Counsel referred to the reasons of Bonner J.T.C.C. in Black v. Canada, [1993] 2 C.T.C. 2825, 93 D.T.C. 1212 at page 2828 (D.T.C. 1215).

In Davies, supra, the taxpayers had been asked to join the company’s board to provide a specific form of expertise, but none of them had experience in the day-to-day financial management of a business. Each of them, moreover, was aware of the statutory requirements regarding source deductions and each believed that a mechanism for handling these issues was in place. In addition, each taxpayer relied on the qualified and experienced financial officer responsible for the day-to-day operations of the company, which the trial judge was reasonable. From the reports prepared by the financial officer, there was no reason for the taxpayer to believe source deductions arrears were owing to Revenue Canada since early 1988; the financial statements revealing this debt was made available to the taxpayers in November 1988. Given the circumstances, the trial judge found it difficult to imagine what further steps one could logically expect the taxpayers to have taken. In the appeal at bar, counsel for respondent says that Giannou was involved in the day-to-day operations of Easteel: he was in touch with the Plant Manager and saw budgets for various contracts, amongst other things. During his term as director the corporation missed several payments of source deductions and was late on some others. Johnson had discussed with Giannou the arrangements for payment of source deductions. Giannou was aware of Easteel’s past financial problems and, during the strike, the potential for future difficulties. As a prudent person, Giannou ought to have informed himself of the situation, counsel insisted.

Respondent’s counsel stated that minor adjustments in subsequent assessments are subject to the sanctions of section 227.1. All of amounts due by an employer must be remitted when due. An employer’s liability and the directors’ liability resulting from the failure of the corporate employer to remit arises from the statute and not from the assessment itself.

Counsel also explained that the principal amounts of the promissory notes represented all arrears owing by Easteel, including interest, to February 14, 1985. However no interest ran on the principal amounts after that date. Under provisions of the Bankruptcy Act, counsel said, no interest accrues subsequent to the time a proposal is filed: she referred to Abacus Cities Ltd. v. AMIC Mortgage Investment Corp. (1990), 2 C.B.R. (3d) 196, 76 Alta. L.R. (2d) 333 at C.B.R. page 201. [4]

With respect to the "degree of care, diligence and skill" of the appellants to prevent the default by Easteel, counsel for the respondent stated the appellants, except for Giannou, knew in autumn 1984 that Easteel was in "poor financial shape". She added it was Easteel who requested and paid for the "look see" by Thorne Riddell Inc.

Prior to February 15, 1985 Thorne Riddell Inc. was not managing, directly or indirectly, the business of Easteel. The "NSF" cheque due January 15, 1985 was issued when Edison, Dwyer and Clarke were managing Easteel.

According to the letter of February 15, 1985 to Easteel, counsel stated, Edison, Dwyer and Clarke were not stripped of their management functions. Management and Thorne Riddell Inc. were to agree on any pre February 14 payable, for example. Management was not at the mercy of Thorne Riddell Inc.

In counsel’s view the liability of Easteel did not arise from the promissory notes; the corporation’s liability was a statutory liability and the promissory notes cannot change the nature of the liability. By accepting the promissory notes Revenue Canada was simply postponing payment of what was due and payable. The promissory notes represented a payment schedule of a statutory liability. The liability of the directors arose once Easteel failed to remit the source deductions when required to do so.

Counsel cited the British Columbia Supreme Court [In Bankruptcy] in Re Irwin 19 C.B.R. (3d) 23, at page 25, for the proposition that where a debtor under a formal proposal subsequently becomes bankrupt, the creditors are restored to their pre-proposal position, less any payment received, and the proposal no longer has any effect. Counsel also referred to Abacus Cities Ltd., supra, at pages 201-02 (Alta. L.R.); Re: White Motor Corporation of Canada Ltd., (1980) 36 C.B.R. 238 (Ont.), at pages 245-46 with respect to proposals.

Counsel submitted that prior to February 15, 1985 Edison, Dwyer and Clarke did nothing more than the appellant in Hamel v. M.N.R., [1992] 1 C.T.C. 2308, 92 D.T.C. 1288 (T.C.C.). As in Hamel, counsel said, the bank had taken over management of the corporation. Easteel continued to operate the business but there was little evidence the directors at the time had any concern as to problems relating to source deductions.

During the period February 1985 and October 1987, there were frequent delays in payment of the source deductions due to Easteel’s cash-flow problems. Officials of Revenue Canada had to telephone Easteel to remind them payments were coming due; threats of legal action were made by the fisc. In October 1987 Easteel finally made arrangements to pay the arrears. However no payment was made for amounts withheld for the October 1987 payroll. Counsel concluded that after December 1984, a voluntary payment by Easteel was rare. She added that the "whole history" was that of Revenue Canada telephoning Easteel to enforce payment. There was no care, diligence and skill by any appellant to prevent the failure of Easteel to make payments of source deductions on the due dates.

Analysis

Edison, Dwyer and Clarke ("active directors") did not exercise the degree of care, diligence and skill to prevent the failures by Easteel to remit source deductions for the December 1984 payroll on or prior to January 15, 1985 that a reasonably prudent person would have exercised in comparable circumstances. Easteel mailed a cheque payable to the Receiver General, apparently on time, but the cheque was returned; a cheque that is no good is not a payment. That a cheque is not honoured by the bank because sufficient funds are not in the payor’s account is not the fault of the bank. These days it is not uncommon for people to blame others or claim it is not their fault when something bad takes place. This is what the appellants are doing: Edison, Dwyer and Clarke say it is not their fault Easteel did not remit payment on January 15, 1985. Their counsel blames the failure on "catastrophic circumstances". I cannot accept this as a reason.

It was in 1983 that the active directors acquired, through a holding company, a majority of the shares of Metalcraft and it was in 1984 that Metalcraft acquired the assets of Easteel Industries Limited. Yet within a year of Metalcraft’s acquisition, the company failed to remit a source deduction payment on time. Dwyer testified Easteel had a system in place to ensure regular and timely payments of the source deductions. But he did not describe the system, saying simply the comptroller of the company was responsible. In Merson v. M.N.R., [1989] 1 C.T.C. 2074, 89 D.T.C. 22 (T.C.C.), a proven system was in place. Mr. Merson described the character, experience and motivation of the person in charge of making the source deductions and that person’s state of health at the time. Mr. Merson had good reason to have confidence in that person. There is no evidence before me in the appeals at bar that Easteel had an effective system in place or that the active directors had such confidence in the person in charge of the system or if that confidence was warranted.

The appeals in Hadad, supra, and Cloutier, infra, relied on by the appellants are not helpful. The comments of the trial judges must be appreciated in the circumstances of those cases. In Hadad, the taxpayer was assessed tax pursuant to subsection 227.1(1) of the Act for failure by the corporation of which he was a director to pay an amount of tax for a taxation year as required under Part VIII of the Act. When a liability under Part VIII was incurred, it was open to the corporation to discharge its tax liability by either paying the tax or by spending a determined sum of money on qualifying research and development expenses. The corporation in Hadad had two options. The director of the corporation made a judgment call and chose the second course of action. Unfortunately the decision was wrong due to a decline in price of oil. As a result the corporation could not pay its Part VIII tax liability. Christie A.C.J.T.C., at page 2220 (D.T.C. 1852), wrote that:

Failure to be prescient about the price of a commodity like crude oil for a period in excess of a year can occur with individuals highly regarded as prognosticators in that market. To my mind, in the absence of a special circumstance of which there is no evidence, default of that kind cannot be construed as a director of a corporation not having exercised the degree of care, diligence and skill to prevent the failure by the corporation to discharge a debt that a reasonably prudent person would have exercised in similar circumstances.

For similar reasons Bowman T.C.J., earlier allowed the appeal of Cloutier v. M.N.R., [1993] 2 C.T.C. 2038, 93 D.T.C. 544 (T.C.C.). In both Cloutier and Hadad the directors made a bone fide decision to cause the particular company to act in one of two ways sanctioned by the Act and they could not be faulted for making a decision that later on is found to be wrong. This is not the situation in the appeals at bar: Edison, Dwyer and Clarke did nothing to prevent Easteel’s default with respect to the December 1994 payroll. Easteel had no other choice but to pay the source deductions on time.

I also find that the active directors did nothing to prevent the default by Easteel during the period Vallis started his "look see" on January 15 to the date the proposal was approved by the court. I would have ruled otherwise with respect to the period the "soft receivership" started to the date the court approved the proposal if I was satisfied that prior to February 14, 1985 Easteel had a system in place to ensure compliance of payment of source deductions. However I have stated that there was no such system. Because there was no system in place the "soft receivership" did not interfere with any corporate practice of paying source deductions on time.

Dwyer testified that after Easteel gave the promissory notes to Revenue Canada, Easteel established a procedure whereby source deductions cheques would be prepared for his signature for hand delivery to Revenue Canada. Revenue Canada would telephone on a regular basis to ensure the payments. A system that requires Revenue Canada’s prodding is not a system contemplated in Merson, supra. There were occasions after August 1985, especially once the strike commenced, that Easteel was late or deficient in its payments of source deductions. Only after the failure by Easteel to pay would Dwyer get in touch with Revenue Canada, if Revenue Canada had not yet been in touch with him first. This is not the action to "prevent the failure” intended by subsection 227.1(3).

During the strike the company employed replacement workers. The company had money to pay these workers, but did not always remit the source deductions to Revenue Canada. Revenue Canada, according to March, contracted Easteel when the defaults came to his attention. Negotiations between Dwyer and Revenue Canada concerned arrears of source deductions. These negotiations were not the exercise of care, diligence or skill to prevent the failure to pay the source deductions as and when required by the statute. These efforts, it must be said, took place after the failure.

The appellants were also assessed with respect to additional assessments adjusting earlier assessments of Easteel. I see no reason why, if the directors are liable on the earlier assessments to Easteel, they should not also be liable on the latter assessments. Easteel, as an employer, is to remit 100% of the source deductions. If as a result of clerical error less than 100% is remitted, the balance is still owed. Whether directors are vicariously liable for assessments adjusting the earlier assessment depends on the circumstances of each cases. The active directors did nothing to prevent the errors in remitting the source deductions or to correct them; the latter was done by Revenue Canada.

Appellant’s counsel argued that once Revenue Canada accepted the promissory notes it is precluded from taking action against the directors since the notes were entered into as a settlement of the arrears existing on February 14, 1985.

The acceptance of a proposal legally results from the operation of law only, rather than from the sole intent of a creditor. The acceptance of a proposal is purely personal to the principal debtor, it is not inherent in the debt and cannot be interpreted as an express or voluntary release: A. Lassonde & Fils Inc. v. Mignon (1992), 17 C.B.R.(3d) 86 (C.S. Qué) at page 90.

Subsection 42(3) of the Bankruptcy Act [now subsection 62(3) of the Bankruptcy and Insolvency Act] states that the acceptance of the proposal does not release any person who would not be released under that statute by the discharge of the debtor. An order of discharge does not release a person who, at date of bankruptcy, was jointly bound with the bankrupt: section 149 [now section 179] of the Bankruptcy Act. A proposal which provides for the release of claims of creditors against guarantors or persons other than the debtor, such as directors, will not be approved by the court: Re: Kern Agencies Ltd. (No. 2), [1931] 2 W.W.R. 633, 13 C.B.R. 11 (Sask. C.A.) cited in Holden and Morawetz, Bankruptcy and Insolvency Law of Canada, 3rd ed., vol. 1, E-3, page 2-121.

Subsection 41(4) [now subsection 60(1)] of the Bankruptcy Act provided that preferred claims are to be paid in priority to other claims. The Bankruptcy Act contemplates the proposal providing for the distribution of property in the nature of promissory notes in subsection 41(6) [now subsec-

tion 60(3)]. Indeed, the Easteel proposal provides:

2. That payment of claims in priority to all other claims (preferred claims), directed by section 107 of the said Act to be so paid in full without interest, from the distribution of the property of the company, in priority to any payments to the unsecured creditors or as may be negotiated by the company and the preferred creditors, based on claims submitted to the trustee.

The promissory notes were negotiated by Easteel and Revenue Canada in contemplation of, and in accordance with, the proposal. The acceptance of payments does not release a guarantee held by the creditor: Latcham v. Canadian Imperial Bank of Commerce (1988), 69 C.B.R. (N.S.) 186, 64 O.R. (2d) 492, 50 D.L.R. (4th) 724 (Ont. S.C.) cited in Holden and Morawetz, supra, page 2- 244.17. I cannot find any authority to support the appellants’ claim that the acceptance of the notes released the active directors and I doubt such authority exists. Revenue Canada did not surrender any of its rights under the Bankruptcy Act when it accepted the notes. The agreement attached to the second promissory note states Revenue Canada "will be relying on its status as a preferred creditor". For a creditor to surrender any of its rights, the terms of the surrender must be clearly expressed.

The Minister is not estopped from pursuing remedies under the Act. The action by the Minister in accepting the notes was a benefit to Easteel and the directors, not a detriment. See Shoyle Holdings Ltd. v. Hunter (1980), 19 B.C.L.R. 359 (S.C.), at page 361, and Woon v. M.N.R., [1950] C.T.C. 263, 4 D.T.C. 871 (Ex. Ct.), at pages 271-73 (D.T.C. 875).

I can find no law that the promissory notes preclude the Minister from demanding interest. The promissory notes represent the aggregate of the amounts, including accrued interest owed to the Receiver General as at February 14, 1985. The proposal provides for the claim represented by the notes. The Minister did not waive interest on behalf of the Receiver General in negotiating the notes. The amounts represented by the notes were validly due to the Crown, the notes were negotiated to facilitate a proposal and the proposal was approved by the court. No interest, as far as I can determine, was "waived" by the Minister.

One also must not lose sight of the fact that once Easteel became bankrupt on March 17, 1988, the creditors of Easteel were returned to their pre-proposal positions, less payments received, and the proposal no longer had any effect: subsection 95(5) [now subsection 122(1)]. Easteel was indebted to Revenue Canada for failure to remit and its directors were jointly and severally liable together with the corporation to pay the debt. No event or transaction that took place between the failures to remit and March 17, 1988 changed the liability of the active directors. The liability of the directors arise from the Act. The directors became jointly and severally liable with Easteel at the date Easteel failed to remit the source deductions. The joint and several liability hoisted on the active directors was born when Easteel failed to remit and continued to exist from that point on. Revenue Canada showed forbearance in accepting the notes to assist the proposal to go forward. The receivership of February 5, 1988 and the subsequent bankruptcy of Easteel affect neither Easteel’s liability nor the joint and several liabilities of the active directors.

Giannou

Giannou’s situation is different from that of the other directors. I would not characterize him as a "puppet” director as in Lévesque, supra, but he had a well founded perception that he was a director unlike the other directors. The other directors, through their holding company, controlled Easteel; they were the "owners” of Easteel and treated Easteel as their Company. Dwyer acknowledged Giannou was asked to leave the room when the active directors discussed Easteel matters and exercised their authority as directors. Indeed, Edison informed Giannou "to mind (his) own business” when he attempted certain initiatives concerning the board of directors.

Giannou was hired to assist Easteel in its relations with labour. He was appointed to the board of directors at the request of the employees. The active directors attempted to limit his role accordingly. The fact that Giannou may have assisted the plant general manager or engage in conversations with Johnson respecting payment of the source deductions, for example, did not extend his role as director of Easteel, as perceived by him, Easteel’s shareholder and Easteel’s labour force, to something greater than it was. The power of the directors to act rested with the active directors and Giannou was never in a position to influence these three men. He was not permitted to act as a director.

Decisions

The appeals of Edison, Dwyer and Clarke are allowed, without costs, to permit the respondent to reduce the assessments to the extent only he received payments from the trustee in bankruptcy (as set out in Schedule II of Exhibit R-1 of the evidence) after the assessments were issued.

The appeal of Giannou is allowed, with costs.

Appeal allowed.