Coopers & Lybrand Limited, Agent for Mercantile Bank of Canada and Receiver and Manager of Venus Electric Limited v. Her Majesty the Queen, [1979] CTC 352, 79 DTC 5273

Gibson, J:—The plaintiff, Coopers & Lybrand Limited, after September 24, 1976 caused to be paid to the employees of Venus Electric Limited the net salaries and wages accrued due owing to them for the two-week period ending September 24, 1976. The amount paid totalled $190,270 which amount equals the net payroll amount that was due and payable as of September 24, 1976 to the employees or (describing the amount paid in another way) is an amount equal to the gross payment due, minus the amount that normally would be deducted for withholding tax, Canada Pension Plan and unemployment insurance contributions.

The issue for determination is whether or not the plaintiff, Coopers & Lybrand Limited, was by reason of the provisions of paragraph 153(1)(a) of the Income Tax Act required to remit withholding taxes which would have been the sum of $28,499.78 (see Exhibit A-9).

The plaintiff is the receiver and manager appointed on September 24, 1976 by Mercantile Bank of Canada, holder of a fixed and floating charge debenture, pursuant to the enabling powers to appoint given in the debenture written contract by Venus Electric to the Bank. In that debenture contract, a copy of which is Exhibit A-2, at paragraph 4-04 Venus Electric Limited by the power given authorized the receiver to take possession of the business, not as the business of the receiver, but as the business of Venus Electric Limited, and authorized the receiver to carry on the business observing all equitable principles vis-à-vis the rights of others than the Bank, namely, Venus Electric Limited and its other creditors, (cf The Clarkson Company Co Ltd v The Queen, [1979] CTC 96; 79 DTC 5150 at 5152) until the receiver had realized the debt due to the debenture holder, Mercantile Bank of Canada.

On September 24, 1976, the plaintiff accordingly took possession of the business and commenced to carry it on.

(Subsequently, the plaintiff, Coopers & Lybrand Limited, was appointed receiver by the court, but that appointment is not relevant in the determination of the issues on this appeal.)

Coopers & Lybrand Limited by virtue of the words in the floating charge debenture contract is called a receiver, but it is really an agent. At paragraph 4-04 the debenture contract reads: “any such receiver shall for all purposes deemed to be the agent of the Company and not the agent of the Bank . . . any such receiver may be vested with all or any of the powers and discretions of the Bank”. As agent it is a servant not a principal. It has great powers, but it is not personally liable on contracts of the company Venus Electric Limited under this floating charge debenture. The Bank appointed Coopers & Lybrand Limited to do for it that which it might have done itself, namely, to carry on the business of the company, Venus Electric Limited, and to do anything that the directors and officers of the company could have done save for this appointment of a Receiver. (See Owen v Cronk (1895), 1 QB 265; 64 LJQB 288; The Clarkson Co Ltd v The Queen, [1979] CTC 96; 79 DTC 5150; Re Emmadart Limited, [1979] 1 All ER 599; Toronto- Dominion Bank v Fortin et al (1978), 85 DLR (3d) 111 ; Re International Woodworker’s of America, Local 1-324 and Wescana Inn Ltd et al (1977), 2 DLR

(3d) 368; and Peat Marwick Limited v The Consumer’s Gas Co (1978), 26 CBR 195.)

It follows that the contractual appointment of Coopers & Lybrand Limited as Receiver of the company Venus Electric Limited did not operate as a dismissal of the employees of the company Venus Electric Limited or as a change of their employer in as much as there was no change in the personality of the employer, namely, Venus Electric Limited, which continued to carry on its business. Management only was in the care and control of the agent, the receiver, Coopers & Lybrand Limited. That was the change.

After September 24, 1976, Mercantile Bank of Canada put Coopers & Lybrand Limited in funds with which, on behalf of the company Venus Electric Limited, it paid to the employees the wages and salaries that had accrued due to them as of September 24,1976, for the two-week period prior to that date.

The defendant submits in part as follows, namely that:

The sole issue for determination is whether or not the Plaintiff was subject to the provisions of Section 153(1)(a) of the Income Tax Act and thus required to remit withholding taxes (which were deducted from the gross payroll as indicated on the payroll records of Venus Electric Limited, for the pay periods ending September 24, 1976), when it paid an amount of $190,270.00 to the employees of Venus Electric Limited, which amount equals the net payroll amount of the employees of Venus Electric Limited after deductions for that period.

The defendant also submits that the evidence established the following facts and these facts are correct:

On September 24, 1976, the Mercantile Bank of Canada under and pursuant to the Demand Debenture, dated March 26, 1976, appointed Coopers & Lybrand Limited as Receiver and Manager of Venus Electric Limited.

By letter dated September 25,1976, Coopers & Lybrand Limited, as Receiver and Manager, notified the employees of Venus Electric Limited that it had been appointed Receiver and Manager and were now responsible for the administration of the company’s affairs and that they intended to continue the company’s operations.

By letter dated September 27, 1976, Coopers & Lybrand Limited, as Receiver and Manager, notified all creditors that:

(a) it had been appointed Receiver and Manager of Venus Electric Limited,

(b) it was now responsible for the administration of the company’s affairs,

(c) it intended to continue the company’s operations.

The amount of $190,270.00 referred to in paragraph 4 of the Plaintiff’s Statement of Claim, is an amount equal to the gross payroll of Venus Electric Limited for the period ending September 24, 1976, minus the deductions for withholding taxes, CPP, and Ul contributions.

The Payroll Register of Venus Electric Limited, maintained by the Scotia Bank for the pay period ending September 24, 1976, indicates that deductions had been made on the accounting records for withholding tax, etc.

That on September 24, 1976, or up to November 5, 1976, there are no facts indicating that the employees of Venus Electric Limited, were, on that date or during that period, dismissed, or that new contracts of employment were factually entered into with the various employees, or further, that any notification was given to the employees by the Receiver and Manager, notifying them that they were employees of any other entity.

Funds to meet the payrolls of Venus Electric Limited, ending on September 24, 1976, were provided for by the Mercantile Bank of Canada and the cheques of Venus Electric Limited, relating to such payroll, were either approved or signed by Coopers & Lybrand Limited as Receiver and Manager.

The income tax deductions indicated on the T-4’s of the employees of Venus Electric Limited equal in amount the total cumulative tax deducted on the payroll register of Venus Electric Limited for the period ending September 24, 1976.

The submission and argument of the defendant in part is as follows:

.. . the specific language of s 153 of the Income Tax Act and its utilization of the words “every person”

... must be taken to have been deliberately chosen .. .

and further,

The fact is that the Statute goes beyond the relationship of employer and employee, and binds any person who is paying the wages of an employee, including G & G. It is simple as that.

(per Berger, J. In Re Bankruptcy of G & G Equipment Co Ltd 74 DTC 6407 at 6408 (SCBC))

and thus, that section properly takes, within its statutory ambit, a class of person like Receiver Managers who factually and legally are by their functions, when paying a claim for wages or arrears of wages

. . . a person paying salary or wages, as he is in the same shoes as was, or ought to have been, the insolvent corporation

(per Monnin, JA in Dauphin Plains Credit Union Limited v Xyloid Industries Ltd et al, at page 12, Unreported decision of the Manitoba Court of Appeal, dated February 6, 1979).

(The submission further was that a pure volunteer stranger who paid Salary or wages, for which such person was not personally liable, could not escape the provisions of paragraph 153(1 )(a) of the Act, that is if such a person gratuitously, out of his own pocket, paid any net salary or wages, he would also have to pay to the Receiver General of Canada the amount of any withholding taxes after computing what would be the gross pay or wages in such circumstances.)

.. . the appointment of the Receiver Manager, on the 24th day of September, 1976, pursuant to the terms of the Demand Debenture, had the effect of

.. . (suspending) the power of the directors over the assets of which the Receiver (had) been appointed, so far as requisite to enable the Receiver to discharge his functions . . .

(per Brightman, J in Re Emmadart Limited (1979), 1 All ER 599 at 602 (Ch D)

and further, that the Receiver Manager then

(1) became responsible for the administration of the company’s affairs;

(2) continued the company’s operations

See: Demand Debenture of Venus Electric Limited, dated March 26, 1976—Defendant’s Book of Documents, page 3 at 13

Letter from Mercantile Bank of Canada to Coopers & Lybrand Limited dated September 24, 1976—Defendant’s Book of Documents, page 25

Letter from Coopers & Lybrand Limited to the employees of Venus Electric Limited dated September 25, 1976—Defendant’s Book of Documents, page 62

Letter from Coopers & Lybrand Limited to all creditors, dated September 27, 1976—Defendant’s Book of Documents, page 26

and thus, the Receiver Manager was

... in complete control of the company’s affairs . . .

(per Cross J in Lawson v Hosemaster Machine Co Ltd (1965), 3 All ER 401 at 410 (Ch D))

. . . during the time period between September 24, 1976, the date of the Receiver Manager’s appointment pursuant to the Demand Debenture, and the Court appointment of November 5, 1976, coupled with the specific facts of this case and the fact that there is no evidence that the Receiver Manager entered into new contracts of employment or dismissed the employees of the company, the contracts of employment between Venus Electric Limited and its employees were not terminated.

I therefore find the law to read that the appointment by the debenture holders of a receiver and manager as agent of the company, not being an appointment under an order of the court, does not of itself automatically terminate contracts of employment previously made and subsisting between the company and all its employees. There are three situations in which this may be qualified.

(per Lawson, J in Griffiths v Secretary of State for Social Services (1973), 3 All ER 1184 at 1198 (QBD))

The three qualifications set forth by His Lordship were:

1. The appointment of the Receiver and Manager was accompanied by a sale of the business of the company; or

2. Simultaneously with, or very soon after, the appointment, the Receiver entered into a new agreement with a particular employee which was inconsistent with the continuation of his previous contract of service; or

3. The continuation of a particular employee’s employment was inconsistent with the role and function of the Receiver and Manager.

On the facts of the present case, none of these qualifications are applicable.

See also: Re Foster Clark Indenture Trusts (1966), 1 All ER 43 at 48 (Ch D)

Re Mack Trusts (Britain) Ltd (1967), 1 All ER 977 at 982 (Ch D)

. . . November 5, 1976, the date of the Court appointment of the Receiver Manager:

1. The effect of such appointment was to continue the operation of the company under the administration of the Receiver Manager. Furthermore, a Receiver Manager is not an assignee, he is a person appointed, not only to preserve the physical assets, but also the goodwill of the business, namely, he is a collector and custodian with varying additional powers of use, disposition, coupled with powers to carry on the business and undertaking. Similarly, the appointment of a Receiving Manager of the assets in business of a company does not dissolve and annihilate the company.

The effect of such an appointment by the Court of a Receiver Manager was considered by the House of Lords in Moss Steamship Company Limited v Whinney (1912), AC 254 at 260, where the Earl of Halsbury said:

.. . The appointment of a (Receiver) removes the conduct and guidance of the undertaking from the Directors appointed by the company and places it in the hands of a Manager and Receiver, who thereupon absolutely supersedes the company itself, which becomes incapable of making any contract on its own, or exercising any control over any part of its property or assets.

Lord Atkinson stated at p 263:

This appointment of a Receiver and Manager over the assets in business of a company does not dissolve or annihilate the company, anymore than the taking possession of the mortgagee of the fee of land left to tenants annihilates the mortgagor. Both continue to exist; but it entirely supersedes the company in the conduct of its business, deprives it of all power to enter into contracts in relation to that business, or to seal, pledge, or otherwise dispose of the property put into possession or under the control of the Receiver and Manager. Its powers In these respects are entirely in abeyance.

Also see: Parsons et al v Sovereign Bank of Canada (1913), AC 160 at 167-168

The results of such a Court appointment does not necessarily terminate contracts of employment. Whether or not such contracts are terminated, dismissal of employees has occurred, or new contracts entered into, will depend on the factual course of conduct of the Receiver Manager and the employees, in dealing with such employment relationships. The complexity of that question which is not at issue in this appeal, was recently reviewed by the Manitoba Court of Appeal in Re International Woodworker’s of America, Local 1-324 and Wescana Inn Ltd et al (1977), 82 DLR (3d) 368, wherein the majority of that Court commented upon this aspect of the concept of Receiver Manager. Mr Justice O’Sullivan for the majority of the Court, stated at page 373:

I am satisfied that the Court is not in any sense the employer of those who work at Wescana Inn. Since it is impossible to be an employee without having an employer, the employer must be either Wescana Inn Ltd or Clarkson.

I think the position of a receiver-manager appointed by the Court is accurately described in Falconbridge on Mortgages, 4th ed (1977), pp 759-60, para 36.5;

If a person is appointed by the court to be receiver and manager of a company, he is not the agent of the company. The company does not appoint him and cannot dismiss him, and he is not bound to obey its directions. Only the court can dismiss him, or give him directions as to the mode of carrying on the business, or interfere with him if he is not carrying on the business properly. As it is impossible to suppose that the relation of agent and principal exists between him and the court, the inference is necessarily drawn that he acts in pursuance of his appointment on his own responsibility and not as an agent. He has in fact no principal. . .

On the issue whether Wescana Inn Ltd or Clarkson is the employer, I agree that the point is not completely settled by authority. On the one hand Pennington’s Company Law, 2nd ed (1967), says at p 411:

If a receiver is appointed by the court . . . all contracts of employment.. . are automatically terminated in the same way as if the company had ceased carrying on business. It is immaterial that the receiver continues carrying on the business temporarily, for he does not do so as an agent for the company, and employees who continue to work for him do so under new contracts of employment with him.

On the other hand, LCB Gower, Modern Company Law, 3rd ed (1969) says at p 437 and footnote 74:

The appointment of a receiver, at any rate if he is appointed out of court, does not automatically terminate contracts of employment with the company

. .. the position of a receiver appointed by the court may be different. It may be, though this is obscure, that such an appointment automatically deter- mines all contracts of employment and that a re-engagement will not be deemed to be continued employment with the company.

In view of the paucity of authority referred to us by counsel on either side, I would be reluctant to decide the question at this time unless it were necessary for the determination of the case.

The submission of Coopers & Lybrand Limited in part is that the said amount of $190,270 paid to the employees was not “salary or wages or other remuneration to an officer or employee’’ within the meaning of paragraph 153(1 )(a) of the Income Tax Act, RSC 1952, c 148 as amended by section 1, c 63, SC 1970-71-72; what Coopers & Lybrand Limited did in obtaining the funds from Mercantile Bank of Canada was financing the company Venus Electric Limited in order to permit Venus Electric Limited to meet its obligation and as a consequence, was not liable to pay withholding tax; that what the Receiver Coopers & Lybrand Limited did in paying the sum of $190,270 was not an act in relation to or having anything to do with the “liquidation, assignment or bankruptcy” of the company Venus Electric Limited within the meaning of subsection 227(5) of the Income Tax Act. (cf Osler, J in Royal Trust Co v Montex Apparel Industries Ltd (1972), 26 DLR

(3d) 405 “receiver is . . . not a liquidation or bankruptcy”.

Subsection 153(1) of the Income Tax Act reads as follows:

153. . . .

(1) Every person paying

(a) salary or wages or other remuneration to an officer or employee.

at any time in a taxation year shall deduct or withhold therefrom such amount as may be prescribed and shall, at such time as may be prescribed, remit that amount to the Receiver General of Canada on acount of the payee’s tax for the year under this Part.

Subsection 150(3) reads as follows:

(3) Every trustee in bankruptcy, assignee, liquidator, curator, receiver, trustee or committee and every agent or other person administering, managing, winding-up, controlling or otherwise dealing with the property, business, estate or income of a person who has not filed a return for a taxation year as required by this section shall file a return in prescribed form of that person’s income for that year.

In section 248 “person” is defined:

“person”, or any word or expression descriptive of a person, includes any body corporate and politic, and the heirs, executors, administrators or other legal representatives of such person, according to the law of that part of Canada to which the context extends;

In my view, this case does not fall to be decided by a reading and applying of paragraph 153(1)(a) of the Income Tax Act simpliciter. Instead, applying that section and other sections of the Act to the facts of this case, one finds that what was done here is that by assessment, “Notice of which was dated December 1, 1976, numbered 389649, the Minister of National Revenue assessed the plaintiff for federal tax of $21,403.33, provincial tax of $7,096.45, together with related penalties and interest for failure to remit the prescribed amount to the Receiver General of Canada on account of the payees’ tax pursuant to subsections 153(1), 227(9) and 227(10) of the Income Tax Act.”

In other words, the Minister assessed Coopers & Lybrand Limited as a person who had failed to remit or pay an amount deducted or withheld as required by this Act or Regulation by virtue of subsections 227(9) and (10) of the Income Tax Act which read as follows:

227.(9) Every person who has failed to remit or pay

(a) an amount deducted or withheld as required by this or a regulation, or

is liable to a penalty of 10% of that amount or $10, whichever is the greater, in addition to the amount itself, together with interest on the amount at the rate per annum prescribed for the purposes of subsection (8).

(10) The Minister may assess any person for any amount payable by that person under Part XIII, this section or section 235 and, upon his sending a notice of assessment to that person, Divisions I and J of Part I are applicable mutatis mutandis.

Therefore, the Minister assessed Coopers & Lybrand Limited because the Minister decided that Coopers & Lybrand Limited was a person liable for an amount ‘‘payable by that person’’ under “this section”, that is, section 227 of the Income Tax Act, which is the section concerned with and is in respect to withholding tax.

The persons liable under section 227 of the Income Tax Act to withhold and pay taxes are among others, the persons referred to in subsection 227(5) of the Act. The words used are “liquidation, assignment or bankruptcy”. There are no other subsections of section 227 that could refer to the duty of a receiver. But these words in subsection 227(5) should be contrasted with the words employed in subsection 150(3) of the Act which employs the words “trustee in bankruptcy, assignee, liquidator, curator, receiver, trustee or committee and every agent or other person administering, managing, winding-up, controlling or otherwise dealing with the property, business, ..

In my view, receivership is not to be read ejusdem generis with “liquidation, assignment or bankruptcy” as those words are used in subsection 227(5) of the Act.

As a consequence, in my view, in the circumstances of this case, Coopers & Lybrand Limited acting as agent only not as a principal in respect to what it did as receiver in paying these employees of Venus Electric Limited the wages and salaries due and accrued to them was not required under the provisions of the Income Tax Act (1) to comply with paragraph 153(1 )(a) of the Act by requiring the Mercantile Bank of Canada to put it in funds for the gross amount of the wages and salaries due the employees of Venus Electric Limited so that it could remit the requisite withholding amount from the gross amount and remit such amount to the Receiver General of Canada on account of the employees’ tax for that part of the year under Part I of the Income Tax Act; and (2) to comply with subsection 227(5) if it had been put in funds for the gross amount of such wages and salaries of the employees of Venus Electric Limited because during any material time there was not any “liquidation, assignment or bankruptcy” of the company Venus Electric Limited and that subsection does not concern the situation where at the material time the company was being carried on by this receiver as agent.

Accordingly, the assessment in this matter against Coopers & Lybrand Limited as a principal under paragraph 153(1)(a) of the Income Tax Act was not correct. There is no obligation anywhere in the Act requiring an agent such as a contract-appointed receiver in the subject situation before it paid “salary or wages or other remuneration to an officer or other employee” that were accrued, due and payable at the time of the receiver’s appointment by contract to demand to be and be put in gross funds sufficient to comply with the provisions of paragraph 153(1)(a) or with section 227 of the Income Tax Act.

The assessment in this case should have been against the proper principal, the company Venus Electric Limited who is and was at all material times the “person” in this case to which paragraph 153(1)(a) of the Act applies and applied.

The appeal is allowed with costs.