Date: 20011010
Docket: 96-3504-GST-G
BETWEEN:
DAVID WILLIAM MOSIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Bowman, A.C.J.
[1] This appeal is from an assessment made under section 323 of the Excise Tax Act against the appellant as a director of T.R.S. Food Service Limited ("TRS"). Subsection 323(1) of that Act imposes a liability on a director of a corporation for the amounts of net Goods and Services Tax that the corporation has failed to remit.
[2] Subsection 323(3) provides to a director a defence of due diligence, and it reads
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.
[3] The appellant was called upon by the three directors of TRS to take over the operation of the company which had fallen into serious financial difficulties. From August 1, 1992 to April 30, 1993 there was a shortfall in the amount of GST paid by TRS. The appellant was assessed as a director during that period in the amount of $594,715.16. The respondent now concedes that even if the appellant is liable under section 323 this amount should be reduced by $59,120.79, plus interest and penalties referable to that amount.
[4] The appeal raises a number of issues, as follows.
1. Does section 323 impose a liability on de facto directors, as opposed to de jure directors?
2. Was the appellant a de facto director in the period in question? It is conceded that he was not a de jure director.
3. If he was a de facto director did he meet the due diligence test in subsection 323(3)?
4. In any event, if the appellant was a director was the assessment (which was made on September 18, 1995) made not more than two years after the appellant last ceased to be a director?
[5] For reasons that I shall develop more fully below I have concluded that
(a) Section 323 does indeed catch de facto directors.
(b) The appellant was not a de facto director of TRS at any time.
(c) In any event, he met the due diligence test in subsection 323(3).
(d) Even if his activities with TRS made him a director, they ceased more than two years before September 18, 1995.
[6] The facts are rather complex and in some instances contradictory. Numerous documents were put in evidence, and five witnesses testified. A lengthy recitation of the facts is not required. It is sufficient to summarize the salient points.
[7] TRS (which is now bankrupt) started operations in 1956. Its business was the provision of food services through vending machines, mobile food vending trucks, and cafeterias. It was successful and by 1990 it had 600 employees and sales of about $24,000,000 from its operation in Ontario and Quebec. Its biggest customer was General Motors of Canada to which it supplied cafeteria services at its various plants in Ontario and Quebec.
[8] TRS was a wholly owned subsidiary of Esposito Holdings Limited[1] ("EHL"). EHL was owned by the three Esposito brothers. Sam (now deceased), Tony and Rocco.
[9] The appellant began working for TRS in 1973 and he advanced through the company in sales and public relations until he became Vice-President, Food Services on October 8, 1991, a position from which he resigned in January 1992. He had no formal education and was not involved with finances.
[10] By early 1992 TRS was in serious financial difficulties whether through mismanagement or through the substantial and unexplained disappearances of cash. In March of 1992 a group of eight employees ("the group of eight") offered to purchase the shares of TRS and EHL. The appellant was never part of this group. The group was led by Larry Fowler, the Executive Vice-President and Chief Executive Officer, and James Grady, the Vice-President, Finance. The evidence was that the group of eight effectively managed TRS. In April 1992 the appellant was fired. On May 29, 1992, James Grady and Larry Fowler "in trust" (which I presume means in trust for the group of eight) signed an offer to buy from the Espositos the shares of TRS and EHL, conditional upon a plan of arrangement under the Companies' Creditors Arrangement Act ("CCAA") being approved. On June 9, 1992 Justice Rosenberg of the Ontario Court declared TRS to be subject to the CCAA and directed it to file a plan of arrangement. It did so on June l6, 1992.
[11] In July 1992 one of EHL's creditors attempted unsuccessfully to petition it into bankruptcy.
[12] The group of eight withdrew their offer to buy the shares of TRS some time in July, following which the Espositos invited the appellant to come back to TRS and manage it in an attempt to salvage its operation. The appellant agreed. He did not trust the audited financial statements and since he had no experience in financial matters he retained the services of a lawyer, Alek Bolotenko, an accountant, Michael Laing, and a management consultant, Mr. Simmons.
[13] On July 15, 1992 the three directors and controlling shareholders (through EHL) signed a resolution making the appellant President and Chief Executive Officer and defining his duties. The document is important in that it sets out the legal basis for the appellant's supervision of TRS and presumably the basis upon which the respondent contends that the appellant was a de facto director. It reads:
DIRECTORS' RESOLUTION
OF
T.R.S. FOOD SERVICE LIMITED
WE, the undersigned, being all of the directors of T.R.S. FOOD SERVICE LIMITED (hereinafter referred to as the "Corporation"), do hereby consent to the following resolutions of the Corporation as evidenced by all of our signatures hereafter in accordance with The Business Corporations Act, Ontario, this 15th day of July, 1992.
BY-LAW TO CHANGE BY-LAW NO. 1
THEREFORE BE IT RESOLVED:
1. THAT pursuant to paragraph 4 of By-Law No. 1 of the by-laws of the Corporation, the directors hereby determine that, as the President and Chief Executive Officer of the Corporation, DAVID MOSIER shall have and is hereby authorized to have general supervision and authority over the direction of all the business and affairs of the Corporation except such matters and duties as by law must be transacted or performed only by the Board of Directors or by the shareholders in general meeting but subject always to the general or specific instructions of the Board of Directors.
2. Without restricting the generality of the foregoing, the President and Chief Executive Officer of the Corporation is hereby empowered to make and enter into all contracts, engagements or commitments on behalf of the Corporation, to employ and discharge all agents and employees of the Corporation, to purchase or otherwise acquire and to sell, transfer, convey or otherwise dispose of on behalf of the Corporation, (to borrow money and negotiate loans on behalf of the Corporation and to execute and deliver on behalf of the Corporation mortgages, charges, hypothecs and other encumbrances of or in respect of all or any of the real or personal property of the Corporation to secure any moneys borrowed by the Corporation), to execute and deliver in the name of and on behalf of the Corporation any and all contracts, agreements, deeds, conveyances, transfers, (bonds, debentures, promissory notes and other securities and obligations) and to affix the seal of the Corporation thereto whenever necessary.
AND WE have all signed.
(signed)
ANTHONY N. ESPOSITO
(signed)
SAMUEL ESPOSITO
(signed)
ROCCO V. ESPOSITO
[14] The appellant's first step was to fire most of the group of eight, including James Grady. He did so in the presence of Rocco and Sam Esposito and, I believe, Tony. He tried to fire Larry Fowler but Sam prevented him from doing so. He did however succeed in assigning him no duties, and he left after a while.
[15] The appellant immediately set out to attempt to revive TRS' failing fortunes. He met with the Royal Bank, to whom TRS and EHL owed large amounts of money. He met with suppliers in an unsuccessful attempt to have them restore the credit terms to 15-30 days. After the bank called its loan the suppliers insisted on cash on delivery. He had Mr. Laing do an audit of the books of TRS and found that the indebtedness of TRS was at least double of that in the most recent financial statements. He ascertained that a substantial number of creditors had not been informed of the CCAA application. He met with the officials of Revenue Canada and worked out a payment plan for the arrears of GST owed. Revenue Canada agreed to $2,400 per week and this arrangement was honoured.
[16] Quite apart from his problems with the suppliers, who insisted on supplying only on a c.o.d. basis, he had to contend with the bank, which controlled all cheques that were issued and decided which ones would be honoured and which ones would not. Since TRS' business was carried on substantially in cash the bank kept an employee at the premises of TRS when cash was delivered and it would count and simply take the cash.
[17] The appellant recognized ultimately that the situation was hopeless and urged the bank to put TRS into bankruptcy. It refused presumably because it, of all the creditors, was getting paid and it had no incentive to put the company into bankruptcy. The appellant urged the directors to put the company into bankruptcy but they refused to do so unless they could be released from their personal guarantees to the bank.
[18] Finally the appellant told the directors in late April or early May of 1993 that he quit and he threw the keys on the table and walked out. This somewhat dramatic gesture was corroborated by Rocco Esposito and I accept that it happened as the appellant said.
[19] On July 22, 1993 the appellant gave TRS and the directors written notice of his resignation, as follows.
RESIGNATION
TO: T.R.S. FOOD SERVICE LIMITED
AND TO: The Directors thereof
I, DAVID MOSIER, the undersigned hereby tender my resignation as President of the above Corporation, to take effect immediately.
DATED the 22nd day of July, 1993.
(signed)
DAVID MOSIER
[20] A further fact should be noted. Mr. Mosier was prepared to buy TRS' assets but would do so only if TRS went bankrupt. Finally it did. On June 22, 1993 at a meeting of the three directors, Sam, Rocco and Tony Esposito, it was resolved that TRS make a voluntary assignment into bankruptcy. The formal assignment took place on September 15, 1993 and the Certificate of Appointment under section 49 of the Bankruptcy and Insolvency Act was filed in court on September 20, 1993. Subsequently the trustee sold the assets of TRS to a company owned by Mr. Mosier.
[21] The foregoing rather sterile summary of the facts is sufficient for me to dispose of the case, although it does not really capture the full flavour of the dramatic events that were described in the viva voce evidence.
[22] I revert then to the series of questions that posed at the beginning of these reasons.
[23] 1. Does section 323 of the Excise Tax Act catch de facto directors? I think it does under some circumstances, but one must be very careful about what one means by the expression "de facto director". In Dirienzo v. The Queen, 2000 DTC 2230, I stated in what was obviously an obiter dictum that in the circumstances of that case the sole shareholder of a company who installed his nephew as a puppet director and nominee was the de facto director. That was an extreme case and I relied upon The Queen v. Corsano et al., 99 DTC 5658, which held that an ostensibly legally appointed director could not rely upon technical defects in his appointment to escape liability under section 227.1 of the Income Tax Act. There is a difference between the two cases. As the Chancery Division stated in Re Lo-Line Electric Motors Ltd, [1988] 2 All ER 692, de facto directors can be those who are ostensibly duly elected but who may lack some qualification under the relevant company law, and those who simply assume the role of director without any pretence of legal qualification.
[24] The court said in that case, at pages 699-700:
Counsel for Mr Browning sought to draw a distinction between two types of de facto director, viz (a) a person who has been appointed director, but invalidly, and (b) a person who has never been appointed director at all. He submitted that, if, contrary to his primary submission, s 300 permitted regard to be paid to the conduct of a director who was invalidly appointed, the section did not extend to the conduct of a person who had never been appointed a director at all. He relied Morris v Kanssen [1946] 1 All ER 586 at 590, [1946] AC 459 at 471 in which the House of Lords drew exactly that distinction in holding that the statutory predecessor of s 285 of the 1985 Act (validity of acts of directors) did not validate the acts of a person who had never been appointed a director at all. I do not accept this submission. For the reasons I have given the plain intention of Parliament in s 300 was to have regard to the conduct of a person acting as a director whether validly appointed, invalidly appointed or just assuming to act as director without any appointment at all. In this context, there is no logic in drawing the distinction put forward by counsel for Mr Browning. Morris v Kanssen was dealing with quite a different section which validated the acts of a director 'notwithstanding any defect that may afterwards be discovered in his appointment or qualification'. In that case, both the words of the section and the common sense of the matter pointed to the section being concerned only with the acts of a person who had been invalidly appointed a director.
In my judgment therefore, under s 300 the court must have regard to the conduct of the respondent as director whether validly appointed or invalidly appointed or merely de facto acting as a director.
[25] This case was cited with approval by Rip J. in Paton v. Canada, [1990] T.C.J. No. 765.
[26] The English legislation is of course different from ours but I cite the Lo-Line case simply to illustrate that de facto director is a concept that is well recognized in law, depending on the circumstances. It should however be applied with caution, particularly where it imposes a liability.
[27] 2. Was the appellant a de facto director? He was not elected as a director, he held no shares of TRS and he never held himself out as a director. Indeed the directors, the Esposito brothers, never represented to anyone that he was a director. He was subject to the legal control of the duly elected directors, Tony, Sam and Rocco Esposito. I do not accept that they ever abdicated their position as directors. They did the sort of thing directors are expected to do — they appointed senior management such as the appellant, and they passed a resolution to put the company into bankruptcy. These are acts of directors in which the appellant did not participate. Indeed he could not have participated or even purported to participate in these purely directorial acts. One can conceive of a situation where the controlling shareholder of a corporation makes all the corporate decisions and installs puppets as directors. Such a person was the uncle in Dirienzo and he would have had great difficulty in resisting liability as a director.
[28] That is not the situation here. The directors appointed the appellant as a senior officer and gave him extensive powers and responsibilities. This did not make him a director, de facto or de jure. In large public corporations extensive powers are conferred on senior officers by directors at semi-annual meetings. Such persons have the power and responsibility of running the day-to-day operations of the corporation but they do not thereby become directors.
[29] There is a lengthy and learned discussion of de facto directors at pages 408 to 411 in Mr. Wegenast's leading text on corporate law Canadian Companies. I cite only a short passage from page 411 which is, I think, useful in this case (footnotes omitted):
There must, however, have been something more than a mere usurpation of office. There must have been something to justify outsiders in assuming that the person or persons in question had been duly elected or were acting with the concurrence of the shareholders, for the doctrine of de facto directors is merely an application of the doctrine of estoppel or "holding out."
The objection to de facto directors cannot, of course, be invoked by an unauthorized director himself, as for example to escape liability for payment of dividends out of capital, or for other misfeasance, or to escape a statutory liability for wages of workmen, or for failure to make government returns, or, it would seem, to claim remuneration or indemnity; for a de facto director is in the same position as an executor de son tort, being subject to all the burdens of his office without any of its benefits. And he cannot himself set up the invalidity of his election by way of objection to the making of a call or the declaration of a forfeiture in which he is interested.
[30] I am inclined to think that the concept of de facto director may have evolved in some degree since Mr. Wegenast wrote the above in 1931. However one wishes to define de facto director — either as one who occupies, whether by usurpation or default, the role of director or one in whose election there is some defect — it is clear that Mr. Mosier was not one of those.
[31] 3. If the appellant was a de facto director did he meet the due diligence test in subsection 323(3)? Even if I am wrong in concluding that the appellant was not a de facto director, I think he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances to prevent the failure.
[32] One fact stands out like a sore thumb. The bank had the company's finances sewn up as tight as a drum. In addition to scooping as much of the cash as it wanted when it came into the cash room, it had[2] an absolute power to veto the payment of any cheques that were issued. The appellant worked out with the CCRA a payment of $2,400 per week to clear up the arrears of tax. On one occasion he persuaded the bank to allow a somewhat larger cheque to the CCRA by threatening to walk away from the whole business. The bank wanted him around because if he succeeded in keeping the business afloat or, better still, if he bought the business — a prospect that was always in the wind but never came to fruition until TRS went bankrupt — the bank's chances of getting paid were enhanced. Apart from this small amount of leverage the appellant was powerless to ensure that CCRA would get paid. He had to perform a delicate balancing act with predators snapping at him from all sides — the bank, the suppliers, the other creditors, the union and the employees. If he failed the company would go under and everyone would have lost, including the CCRA and the 600 employees.
[33] One has to ask: what could he have done that he did not do? The answer is absolutely nothing. The case is in some ways reminiscent of Holmes v. R., [2000] 3 C.T.C. 2235, where the directors were unable to ensure that the CCRA be paid because the company's finances were completely controlled by their supplier. At pages 2241-2242 I referred to an earlier decision as follows.
I set out in Cloutier v. Minister of National Revenue (1993), 93 D.T.C. 544 (T.C.C.) at pp. 545-6, my approach in these cases.
The question therefore becomes one of fact and the court must to the extent possible attempt to determine what a reasonably prudent person ought to have done and could have done at the time in comparable circumstances. Attempts by courts to conjure up the hypothetical reasonable person have not always been an unqualified success. Tests have been developed, refined and repeated in order to give the process the appearance of rationality and objectivity but ultimately the judge deciding the matter must apply his own concepts of common sense and fairness. It is easy to be wise in retrospect and the court must endeavour to avoid asking the question "What would I have done, knowing what I know now?" It is not that sort of ex post facto judgement that is required here. Many judgement calls that turn out in restrospect to have been wrong would not have been made if the person making them had the benefit of hindsight at the time.
Section 227.1 is an example. That section imposes a standard of care on directors that requires reasonable prudence and skill in ensuring that the money raised through the SRTC program be in fact used for scientific research or else that the Part VIII tax be paid either out of the money so raised or otherwise. In determining whether that standard has been met one must ask whether, in light of the facts that existed at the time that were known or ought to have been known by the director, and in light of the alternatives that were open to that director, did he or she choose an alternative that a reasonably prudent person would, in the circumstances, have chosen and which it was reasonable to expect would have resulted in the satisfaction of the tax liability. That the alternative chosen was the wrong one is not determinative. In cases of this sort of failure to satisfy the Part VIII liability usually results either from the making of a wrong choice in good faith, or from deliberate default or wilful blindness on the part of the director.
I find as a fact that there is nothing that Mr. and Mrs. Holmes could reasonably have done to prevent the failure. They struck me as decent, honourable people who did all they could to ensure that the corporate obligations were fulfilled, but the economic circumstances rendered that impossible.
[34] This approach is one that I have followed in other cases and one that is, I believe, consistent with the series of cases in the Federal Court of Appeal which have invariably modified the more stringent standards applied in this court. The cases in the Federal Court of Appeal to which I am referring are The Queen v. Corsano et al. (supra), Worrell v. R., [2000] G.S.T.C. 91, Smith v. The Queen, 2001 DTC 5226, Cameron v. The Queen, 2001 DTC 5405, and Soper v. The Queen, 97 DTC 5407.
[35] I need not quote from them. They stand for the proposition that section 227.1 of the Income Tax Act and subsection 323(3) of the Excise Tax Act require only that directors act reasonably. They do not demand the impossible. I have no hesitation in following that approach.
[36] 4. The final question is whether, if the appellant was a de facto director, he ceased to be one over two years before the assessment on September 18, 1995. How does one cease being a de facto director?[3] Of course you cannot cease being what you were not in the first place, but accepting for a moment the Crown's hypothesis that he was at some point a de facto director, is it enough to throw the keys on the table and say "I quit" and walk out and then sign a resignation as president?
[37] I think it is. These are not mere theatrical gestures signifying nothing. They were intended to mean something. A de jure director might have to have his or her resignation accepted by the board but I know of nothing in corporate law that would impose such a requirement on a de facto director. Both the throwing of the keys, which occurred in late April or early May 1993 and the signing and delivery of the resignation on July 22, 1993 were well outside the two year period before the date of the assessment. The Crown argues however that these acts were mere histrionic window dressing, because even after July 22, 1993 the appellant went on merrily signing cheques: plus ça change, plus c'est la même chose. I do not think this in itself proves he remained a de facto director right up to the bankruptcy assuming he ever was one. In any event the clincher, in my view, is the series of events that occurred prior to September 18, 1993. On June 22, 1993, a month before the appellant's formal resignation, the three directors signed a resolution that TRS make a voluntary assignment into bankruptcy. On September 15, 1993 the formal assignment in bankruptcy was signed by Rocco Espositio as President of TRS. In his affidavit sworn on September 15, 1993 in support of an order permitting the immediate sale of the assets of TRS, Rocco describes himself as President of TRS. The agreement between the trustee of TRS and T.R.S. Foods (1993) Ltd. (the appellant's company) was signed on September 15, 1993. The motion was made on Friday, 17 September 1993. The assignment was filed with the court on September 20, 1993 and the order of Houlden J. was made on that day.
[38] I do not think one starts counting from September 20, 1993. Whatever factual or legal position the appellant may have occupied with TRS the events described above establish, whether singly or cumulatively, that he stopped occupying it well before that date. One simply cannot reconcile these acts with the position that up to and including September 18, 1993 the appellant was a de facto director of TRS.
[39] For all the above reasons and notwithstanding Mr. Bornstein's usual thorough and skilful presentation of the Crown's case the appeal is allowed with costs and the assessment made under section 323 of the Excise Tax Act is vacated.
Signed at Ottawa, Canada, this 10th day of October 2001.
"D.G.H. Bowman"
A.C.J.
COURT FILE NO.: 96-3504(GST)G
STYLE OF CAUSE: Between David William Mosier and
Her Majesty The Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: September 24, 25 and 26, 2001
REASONS FOR JUDGMENT BY: The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF JUDGMENT: October 10, 2001
APPEARANCES:
Counsel for the Appellant: Michael Gasch, Esq.
Counsel for the Respondent: Arnold Bornstein, Esq.
COUNSEL OF RECORD:
For the Appellant:
Name: Michael Gasch, Esq.
Firm: Robins, Appleby & Taub
Toronto, Ontario
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
96-3504(GST)G
BETWEEN:
DAVID WILLIAM MOSIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 24, 25 and 26, 2001, at Toronto, Ontario, by
The Honourable D.G.H. Bowman
Associate Chief Judge
Appearances
Counsel for the Appellant: Michael Gasch, Esq.
Counsel for the Respondent: Arnold Bornstein, Esq.
JUDGMENT
It is ordered that the appeal from the assessment made under section 323 of the Excise Tax Act, notice of which is dated September 18, 1995 and bears number 04563 be allowed with costs and the assessment be vacated.
Signed at Ottawa, Canada, this 10th day of October 2001.
|
"D.G.H. Bowman" |
A.C.J.
[1] Their statement is substantially correct although it should be noted that when TRS began to have cash flow problems in the early 1990's some employees (not the appellant) were persuaded to accept some of their salary or wages in the form of shares.
[2] Or at least exercised — the bank's legal power to control the payment of cheques was never made clear to me, but it certainly had overwhelming economic clout.
[3] I am aware that legally appointed de jure directors do not cease to be directors by the mere fact that a receiver of the company is appointed. The Queen v. Kalef, 96 DTC 6132.