New potential for oppression provisions of the Alberta Business Corporations Act

The Alberta Court of King’s Bench allowed a dismissed employee to use the oppression remedy for a severance claim in Wisser v. CEM International Management Consultants Ltd., 2022 ABQB 414. The dismissed employee successfully brought a claim as a creditor under the Alberta Business Corporations Act, RSA 2000, c B-9 (“ABCA”) to recover damages jointly and severally against the directors and a new corporation created by those directors.

Background facts

CEM International Management Consultants Ltd. (“CEM”) provided management consulting services. CEM had two Vice Presidents, Mr. D’Ailly (“Dailly”) and Mr. Ascah (“Ascah”), who were also directors and shareholders of the company. The Plaintiff was initially hired as a Business Coach in 2007, and though he was later reclassified as an independent contractor, he continued working for CEM until 2011 when he was re-hired as an employee. In 2015, he was terminated without cause and received 4 weeks severance.

The Plaintiff commenced an action against CEM, D’Ailly and Ascah in May 2015, alleging wrongful dismissal and seeking both additional severance pay and punitive damages.

CEM’s business struggled in 2015 and 2016.  Despite an effort to rebrand by changing its name to Forefront Performance Inc. (“FPI”), by April 2016, all remaining employees of CEM had been terminated and the remaining shareholders had cashed out.

In September 2016, D’Ailly and Ascah incorporated 1994992 Alberta Ltd. (“199 Alberta”), with both individuals named as directors holding 95% of the shares.  199 Alberta offered consulting services that were “substantially the same” as CEM, operated under CEM’s rebranded name FPI, rehired many of the former CEM employees, and earned significant revenue in its first year.  In October 2016, during the last shareholders’ meeting for CEM, D’Ailly and Ascah purchased the title to the “branding and methodology” of intellectual property of CEM.

In 2018, CEM was struck from the corporate registry for failing to file annual returns.

The Plaintiff subsequently amended his action to include 199 Alberta as a defendant and to allege oppressive conduct on the basis that D’Ailly and Ascah abandoned CEM and took the remaining assets out of CEM solely due to the lawsuit commenced by the Plaintiff.

Alberta King’s Bench decision

The oppression claim

A claimant seeking relief on the basis of oppression or unfairness under s. 242 of the ABCA must establish the following elements:[1]

1. They are a “complainant” as defined in s. 239 of the ABCA;
2. They had reasonable expectations of the defendants which were not met; and
3. The defendants’ failure to meet those expectations constitutes conduct that was oppressive or unfairly prejudicial or which unfairly disregarded the claimant’s interests.

What constitutes a complainant for the purposes of oppression

Although the Plaintiff was not a shareholder of CEM or 199, he was found to be a proper complainant. Notably, the Court confirmed that while creditors are not “complainants” as of right under s. 239 of the ABCA, the Court has the discretion to declare a creditor a “complainant” under 239(iii)(B) if that party:

• has a direct financial interest in the company’s affairs but no ability to influence or change the decisions of management; or
• that party can show a legitimate interest in the affairs of the company, similar to a shareholder interest in a small company.

In this case, the Court held that the Plaintiff was a complainant for the purposes of advancing an oppression claim on the basis that he had been a long-serving employee of a small company, his claim was the only claim outstanding at the time CEM ceased operations, and his claim remained outstanding as CEM divested itself of assets and its principals began making money under a new corporate identity.

What constitutes reasonable expectations of a corporation

The Court made a number of notable findings in relation to the second element for claiming oppression:

• A claimant’s reasonable expectations will arise from his subjective expectations but must also square with an objective view of the relationships and facts specific to the case.
• Relevant factors include the size of the company and the nature of their relationship.
• In attempting to advance an oppression claim, creditors have a reasonable expectation that the company’s business and assets will not be unfairly re-structured in a way that payment of debts becomes impossible.[2]

Here, the Court held that:

• CEM was a closely held company, with D’Ailly and Ascah being the only two shareholders remaining by the time assets were transferred and CEM wound down.
• At the time CEM was being wound down, D’Ailly and Ascah were aware of the Plaintiff’s claim but made no effort to deal with it as part of moving on to their next business.
• The Plaintiff had a reasonable expectation that CEM’s business and assets would not be unfairly restructured to benefit management at his expense.
• It is unfair to advance a well-grounded claim for severance only to watch the corporate directors transfer remaining assets to themselves and then create a new company to carry on the same business but without any obligation to pay you.

What constitutes oppressive or unfairly prejudicial conduct

As noted by the Court, stakeholders are entitled to fair treatment, but their interests may not prevail over others, particularly if a director is acting in the best interests of the company.[3]  In such cases, oppressive conduct is difficult to prove where the best interests of the company are truly adverse to those of a stakeholder or complainant. In relation to creditors, the Court will look at whether the company has undertaken a deliberate course of conduct to strip the company of its exigible assets in the face of an existing or pending debt action.[4]

In this case, while the Court declined to find that the Defendants’ actions constituted bad faith, it found that:

• the only thing that was accomplished by creating 199 Alberta was to shed any liability for the Plaintiff’s severance; and
• the prejudicial impact and disregard for the Plaintiff’s claim rendered the Defendants’ actions oppressive.[5]

The Court determined 199 Alberta was liable for the Plaintiff’s damages relating to wrongful termination by CEM, on the basis that 199 Alberta had received all the advantages of CEM’s business, such as its intellectual property, goodwill, and management expertise, without any of its responsibilities to its employees.[6]

Can individual directors be held personally liable in an oppression claim?

To hold individual directors personally liable for oppression, a claimant must also meet the “fit and fair” test:[7]

1. The conduct must have been done in their capacity as a director or officer;
2. The director or officer must have exercised, or failed to exercise, his or her powers in furtherance of the oppressive conduct;
3. There must be a valid reason to require directors or officers to compensate complainants out of their own pockets, such as if they personally benefited from the conduct at the expense of the complainant, they misused their power, or they breached their duties as directors and officers; and
4. A finding of oppression depends more on the result of the conduct than the intention of its perpetrators. As such, while evidence of bad faith is important, it is not necessary in order to impose personal liability.

In this case, the Court found D’Ailly and Ascah personally liable for the following reasons:

• They were acting in their capacity as the only remaining directors and shareholders of CEM when they transferred its assets to themselves, ceased CEM’s operations, and started a new company under the same tradename with themselves as directors and majority shareholders.
• They benefited from the profitability of the new company, without considering the welfare of their former employee who had filed a legitimate claim in a timely manner.[8]

Practical takeaways

The Alberta Court of King’s Bench decision in Wisser is a significant victory for creditors who previously had limited recourse when a corporation sold off its assets and re-established itself under a different corporate identity. Notably, this decision confirms the ability of creditors, which may now extend to employees with meritorious wrongful dismissal claims, to utilize the oppression provisions of the ABCA to recover damages not only against the new company, but also against the directors personally, even in the absence of bad faith.

The winding up of a corporation and the subsequent creation of a new corporation conducting or offering similar operations or services is not unique.  Neither is the transference of assets, intellectual property, or goodwill from the old business to the new.  How these actions are managed, however, is critical, particularly in situations in which there may be existing or even pending debt claims against the old corporation.

While the steps that can be taken in order to protect both the new corporation and directors are largely fact-specific, setting up contingency funds for potential or existing debts is one method that has been identified in jurisprudence as a factor relevant to a claim for oppressive relief.

Miller Thomson LLP is here to help with all your legal needs. Should you have any questions or need assistance or advice regarding a claim for oppression, please contact Miller Thomson’s Commercial Litigation team.

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[1] Wisser v. CEM International Management Consultants Ltd., 2022 ABQB 414 at para 63 [Wisser].

[2] Ibid. at para. 69 citing PricewaterhouseCoopers Inc. v. Perpetual Energy Inc., 2021 ABCA 16 at para. 24.

[3] Ibid. at para 75.

[4] Ibid. at paras. 84-85, citing 1007374 Alberta Ltd. v. Ruggieri, 2014 ABCA at paras. 7-9 and Vallaincourt v. Carter, 2016 ABQB 492 at paras. 113-114.

[5] Ibid. at paras 79, 81, 89.

[6] Ibid. at para 90.

[7] Ibid. at paras. 92-95, citing Budd v. Gentra, [1998] O.J. No. 3109 (C.A.).

[8] Ibid. at paras 97-99.