The Appeal CommissionThe Workers Compensation Act of Manitoba

Preamble

An Appeal Panel hearing was held between September 11 and 13, 2001 at the request of legal counsel representing the above parties. The Panel discussed this case on several occasions, the last one being January 24, 2002.

Issue

Whether or not the claimant’s right of action is removed pursuant to Section 68(4) of the Act.

Decision

That the claimant’s right of action has not been removed pursuant to Section 68(4) of the Act.

Background

This case involves a worker who was injured as a result of a workplace accident. On November 18, 1995, he was working inside a large exhaust stack of a spray paint booth, when a flash fire occurred. As a result of this fire, the claimant sustained serious and permanent burns and injuries to his body.

His claim for compensation was accepted by the Workers Compensation Board (WCB) of Manitoba and benefits were paid accordingly. He continues to receive benefits from the WCB.

On July 22, 1997, the WCB filed a Statement of Claim in the Court of Queen’s Bench, naming the WCB and the Claimant as Plaintiffs. Named as Defendants are the two directors of the accident employer, who are also the President and Vice-President of the corporation (Defendant A and Defendant B).

The Statement of Claim alleges that the injuries suffered by the Claimant/Plaintiff resulted from a breach of duty and/or negligence of the defendants.

Pursuant to subsection 68(4) of The Workers Compensation Act, the defendants have applied to this Commission for a determination that the right of action is removed by the provisions of the Act.

A Panel met with counsel for both parties, on November 28, 2000, to discuss the issues to be considered, to determine the nature of materials to be filed, and to outline procedure to be followed at the hearing. A full hearing was held with all parties present on September 11, 12, and 13, 2001.

Subsequent to the hearing, the Appeal Panel met to discuss the case and it determined that additional information was required before deciding the issue before them. Specifically, the Panel requested that the following information be obtained:

• That the WCB’s legal department conduct an in-depth search of all relevant case law involving WCB cases where legal action has been taken against a director;

• That the WCB’s legal department research the King Committee and Legislative Review Committee reports and provide the panel with any portions of the reports that deal with coverage for directors/executives;

• That counsel for the appellants and respondent provide the panel with further argument and supporting case law with respect to piercing the corporate veil where multiple corporations are involved.

On November 19 and 22, 2001, all interested parties were provided with copies of relevant materials that were obtained by the Appeal Panel and were asked to provide comment by December 3, 2001.

On November 30, 2001 a request was made by legal counsel for additional time to prepare its submission to the Panel. The request for an extension was granted. On January 24, 2002, the Panel met further to discuss the case and took into consideration final submissions from counsels dated January 4, 2002 and January 7, 2002 and came to a split decision.

Reasons

Chairperson Sargeant and Commissioner Monk:

In order to come to a decision in a “section 68(4) hearing”, it is essential to establish the status of the parties in relation to the Act. In this specific case, the Panel must determine whether or not the defendants are workers as defined in the Act; or whether or not they are employers as defined in the Act. A positive finding in respect of either would afford the defendants the protection of the Act and remove the right of action.

It is not the role of the Panel to adjudicate or come to any decision in respect of the allegations contained in the Statement of Claim. Our sole purpose is to determine whether or not The Workers Compensation Act (the Act) works in such a way as to bar the plaintiffs from proceeding with their action in court.

We have concluded that the right of action is not removed by the Act.

Relevant Legislation

The authority for this panel to determine whether or not an action may proceed is conferred by subsections 60.8(1)(b) and 68(4) of the Act, which read:

Jurisdiction of appeal commission

60.8(1) Subject to subsection 60.9, the appeal commission has exclusive jurisdiction to examine, inquire into, hear and determine all matters and questions arising under this Part in respect of

(b) determinations under subsection 68(4).

Board to determine right of action

68(4) Where an action in respect of an injury is brought against an employer or a worker of an employer by a worker or the legal personal representative or a dependant of the worker, the board has jurisdiction, on the application of a party to the action, to adjudicate and determine whether the right of action is removed by this Act; and the adjudication and determination is final and conclusive, and if the board determines that the right of action is removed by this Act, the action shall be forever stayed.

Subsection 1(1) sets out the definitions of terms used in the Act. The definition of “employer” and “worker” read, in part:

"employer" includes

(a) a person

(i) who has in service under a contract for hiring or apprenticeship, written or oral, expressed or implied, a person engaged in work in or about an industry…..

"worker" includes

(a) a person, whether or not under the age of 18 years, who enters into or works under a contract of service or apprenticeship, written or oral, expressed or implied, whether by way of manual labour or otherwise, ….

(e) an employer who is admitted by the board as being within the scope of Part I under subsection 74(3), ….

(g) a director of a corporation who is admitted by the board as being within the scope of Part I under subsection 74(3), ….

Restriction on definition of "worker"

1(3) The definition of "worker" in subsection (1) does not include

(a) a director of a corporation, unless an application to have the director brought within the scope of Part I is received and approved by the board;

Employer may be admitted to compensation

74(3) Any employer or director of a corporation in an industry within the scope of this Part may be admitted by the board as being entitled for himself or herself, and his or her dependants, to the same compensation as if the employer or director were a worker within the scope of this Part.

Compensation to employer, employed family member

74(4) Unless an application to come within the scope of this Part is approved by the board, compensation is not payable under this Part to

(a) an employer;

(b) a director of a corporation that is the employer; ….

According to subsection 9(1) of the Act a worker may, in certain circumstances, bring an action against a third party. However, this right is qualified by subsections 9(5) & 9(7):

Right of action against person other than employer

9(1) Where an accident happens to a worker in the course of his employment under such circumstances as entitle him or his dependants to an action against some person other than his employer, the worker or his dependants, if entitled to compensation under this Part, may claim the compensation or may bring such an action.

Where claim vested in board

9(5) Where a worker or dependant makes application to the board claiming compensation under this Part, which claim is thereafter approved by the board, any right of action for or in respect of a personal injury to, or the death of, the worker which the worker, or his legal personal representative or dependant, may have been entitled to maintain against a person other than his employer under subsection (1), immediately on approval of the claim by the board, becomes vested in the board; and the board may enter action in its name or in the name of the injured person, or his legal representative or dependant, or jointly with the injured person, or his legal personal representative or dependant, against the other person for the whole or any outstanding part of the claim of the worker, or his legal personal representative or dependant, against the other person for or in respect of the personal injury to, or the death of, the worker.

Limitation of right of action

9(7) In any case within subsection (1), the worker, his or her legal personal representative and dependents, and the employer of the worker have no right of action in respect of the accident against an employer in an industry, or against a worker of such an employer, where the accident happens within the conduct of the operations usual in, or incidental to, the industry carried on by the employer.

Workers compensation legislation was first introduced into Manitoba in 1916 as a disability scheme, which was designed to compensate workers who were injured as a result of workplace accidents. The Workers Compensation Act establishes a social contract of insurance whereby workers have relinquished their right to sue in exchange for prompt and reasonable compensation regardless of fault. On the other side of the equation, employers have received immunity from suit in exchange for their funding the costs of the scheme. The worker’s contractual entitlement to compensation in lieu of other rights is set out in subsection 13(1) of the Act:

Compensation to be in lieu of other rights

13(1) The right to compensation provided by this Part is in lieu of all rights and rights of action, statutory or otherwise, to which a worker, or his legal representative, or his dependents, are or may be entitled against the employer, for or by reason of personal injury to, or the death of, the worker occasioned by any accident which happens to him arising out of, and in the course of, his employment; and no action in any court of law against the employer in respect thereof thereafter lies.

A worker’s entitlement to compensation is set out in subsection 4(1) of the Act:

Compensation payable out of accident fund

4(1) Where, in any industry within the scope of this Part, personal injury by accident arising out of and in the course of the employment is caused to a worker, compensation as provided by this Part shall be paid by the board out of the accident fund, subject to the following subsections.

Findings of Fact

Opposing counsel did not present the Panel with an agreed statement of facts. The Panel determined the following facts to be undisputed and relevant to the resolution of this appeal:

• The claimant was a worker, and was employed by the directors’ business at the time of his injuries.

• The business was registered with the WCB as a covered employer under Part I of The Workers Compensation Act at the time of the claimant’s workplace accident in 1995.

• The employer had been paying its employer assessments to the WCB based on its payroll, and this assessment included the claimant as part of its coverage.

• The claimant suffered serious injuries while in the course of his employment. The WCB accepted his claim, and the WCB has been proactive in assuring that the claimant has had full access to the benefits provided under the Act, including wage loss benefits, permanent impairment awards, medical aid, and vocational rehabilitation services.

• The employer corporation is incorporated, pursuant to the laws of Manitoba.

• Defendant A is the sole shareholder of Holding Company A. Defendant B is the sole shareholder of Holding Company B. Holding Companies A and B are equal shareholders in the employer corporation.

• Defendant A serves as President of the corporation. Defendant B serves as Vice-President.

• At the time of the accident, neither director worked for the company or played any role in the operational affairs of the company. Defendant A had resigned as General Manager on May 15, 1995. Defendant B had resigned as Office Manager on April 30. 1988.

• The employer continued as a covered employer under Part I of the Act after the date of the claimant’s workplace injury. It continues to pay assessments to the Board.

• The WCB has offered “special coverage” to defined categories of individuals – directors, and family members – under the Act for a considerable period of time prior to the date of the workplace injury in 1995. This special coverage “deemed” the director to be a worker under the Act. Under this process, directors can fill out an application for special coverage including a deemed wage, and on acceptance by the Board, be entitled to compensation benefits as if they were workers.

• Neither director, in this case, had “special coverage” as allowed under subsection 74(3) of the Act.

• The WCB Board of Directors does not have a policy regarding third party claims in general or regarding the issue of directors’ liability for workplace injuries to their workers.

• In October 1997, the WCB first communicated to the general employer community an expanded interpretation of special coverage for directors as also providing immunity to suit. In their search of organizational records, there was no prior communication of this expanded definition to the general employer community, or specifically to the employer or directors involved in this action.

• Even at that time, the communication about liability for suit was not provided directly to all employers. From 1997 to 1999, the Employer Guide referred to an optional fact sheet on special coverage that employers could request if they were interested in special coverage for their directors. This fact sheet provided the details regarding directors’ immunity from suit. Directors who were already covered as deemed workers would not have received this information.

• The first inclusion in the general Employers Guide directly, of the immunity to suit issue for directors, was for the year 2000.

The Issue

At issue is whether the applicants, as directors of the employer corporation are afforded the immunity granted by subsections 9(7) and 13(1) of the Act.

To resolve this issue, the Panel had to answer three questions:

1. Are the directors “workers”, as defined in subsections 1(1) and 1(3) of the Act?

2. Are the directors “employers”, as defined in subsection 1(1) of the Act?

3. Is a corporate director a third party as contemplated in subsection 9(1)?

A ‘yes’ answer to either of the first two questions would afford the applicants the immunity from suit provided by the Act, and the statement of claim could not go forward.

A ‘no’ answer to both questions 1 and 2 and a ‘yes’ to the third would deny the immunity from suit and allow the action to proceed.

For the applicants to be successful, the Panel must find, on a balance of probabilities, that the directors (and named defendants in the case before us) are not true third parties, but are either workers or employers as defined by the Act.

Introduction

The action taken by the Workers Compensation Board of Manitoba (the Board) in this case is recent and highly unusual. What the Board is doing in this case is to attempt to go behind the corporate entity of the employer, which is protected from suit by the Act, and seek financial redress from the directors and/or shareholders of the employer corporation.

To say this action is highly unusual is an understatement. In the more than 85 year history of workers compensation in Manitoba, there has never been such a case adjudicated by the courts of this province.

There has been one adjudication of a similar case by this commission, Decision No. 40/01. In that decision, there was a split among the Commissioners hearing the case, with the Chair of the Panel supporting a strict interpretation of the Act and one panelist coming to a more expansive interpretation. The third panelist supported the Chair’s strict interpretation, but was clearly troubled by the implications of the decision and the board’s action.

There have been very few similar cases in other provinces. However, it was likely a 1983 Ontario case, Berger v. Willowdale AMC [1983] 145 DLR (3d) 247 (Ont. CA), which was the catalyst for the Manitoba board to pursue this action. In that case the Ontario Workers Compensation Appeal Tribunal allowed an action by an employee against an executive of the company to go forward. This decision was based on a strict interpretation of the statute as it then was.

The Board contends that a corporate director is neither a worker nor an employer, as set out in the Act, even where he or she holds an executive position with the corporation. As such, the director can then be considered to be a third party, against whom an action may be taken, pursuant to section 9.

For a number of years, the Board, pursuant to subsections 74(3) and 74(4), offered “special coverage” to corporate directors. This special coverage entitled the director to receive the compensation provided in Part I of the Act, as if the director were a worker. To get this coverage, the director must make application to the Board. It is a matter of fact that the applicants had not applied for this special coverage.

It is the position of the Board that one element of the compensation included in the special coverage is the immunity from suit provided, by the Act, to workers and employers. It is a matter of fact that the Board did not communicate this to employers – and their directors – until after the workplace accident that forms the basis of this claim.

The applicants in this case argued that the Board is wrong in interpreting sections 9 and 74 in such a way as to allow actions against corporate directors. They further argued that this action undermines the founding principles of the workers compensation schemes in place across the country. They made note of the so-called “historic trade-off”, by which employers agreed to support the scheme financially in exchange for workers’ giving up the right to take civil action against their employers.

After an extensive review of the claims file and the legal submissions, as well as hearing testimony at a three-day hearing, the Panel concluded, unanimously, that the Board’s actions did threaten the philosophical underpinnings of workers compensation. But, a majority of our Panel concluded that there was nothing in the Act to prevent the Board from taking such actions.

Q #1 - Are the Applicants “Workers”?

If the directors are found to fall within the definition of “worker”, then they would be protected from suit by subsection 9(7).

Counsel for the applicants argued that, by reason of their dual roles of executive officer and director, the applicants are “workers” within the meaning to be given that term for purposes of ss. 1 and 9 of the Act.

Counsel noted that, prior to 1992, the definition of “worker” specifically excluded “executive officers”. Amendments to the Act, passed in 1991, removed this exclusion, with executive officers being deemed to be workers for the benefit of the Act. However, these same amendments maintained a specific exclusion for “directors”.

Counsel argued that this exclusion should not apply to directors who also occupy a role as an executive officer; that it should apply only to those with the singular role of corporate director. He reasoned that it does not make sense for a statute to grant status of worker to an executive officer in s.1(1) and then strip away that right under s. 1(3).

In looking to the intent of the legislators when they passed these amendments, the Panel concluded that the legislators did, indeed, intend to deny the status of worker to directors, even if they were also executive officers.

In this regard, we note a document, entitled Significant Proposed Amendments to the Workers Compensation Act, dated May 23, 1991, produced by the Steering Committee on Legislative Reform. The very first proposal reads:

“To delete the term ‘executive officer of a corporation’ from the proposed Act. This will result in Executive Officers being automatically covered as workers, unless they are Directors of a corporation. ….”

When the Minister of the day was speaking in the assembly at second reading, he made the following comment in respect of this amendment:

“Finally, the new provisions allow for coverage to extend to all employees of the company including executive officers, but excluding only directors who may seek voluntary coverage.”

Counsel for the Applicants asked us to interpret the post-1992 statute as meaning that, if a person was an executive of a corporation, it mattered not that he was also a director: this clause deemed the person to be a worker. In other words, in a case where one occupies both, the roles of executive and director cannot be separated.

On the other hand, this clause could as easily be interpreted to mean that an executive is deemed to be a worker, unless he or she also serves as a director of the corporation. If a director, who is also an executive officer, is thus subsumed into the “worker” category, it would render meaningless those clauses of the Act which refer specifically to “directors”, in particular ss. 1(3), 74(3) and 74(4).

In order to give meaning to subsections 1(3), 74(3) and 74(4), the Panel is, unanimously, of the view that the latter interpretation is correct.

Thus, we find that the applicants are not workers, as defined in the Act.

Q #2 - Are the Applicants “Employers”?

The other key issue to be determined is whether or not the applicants, as directors of the employer corporation, are “employers” as defined in the Act. If the directors are found to be employers, they would be protected from suit by subsections 9(7) and 13(1).

The majority of the Panel found them not to be; the third Panelist held them to be employers. His reasons will appear elsewhere in this decision.

Two very different arguments were presented to the Panel by opposing counsel.

Subsection 1(1) of the Act defines "employer" as including a person (including a corporate entity) which engages a person under a hiring contract to perform work in or about an industry.

Counsel for the applicants submitted that, in interpreting what the Act means by “employer”, we should adopt an expansive definition. In support of this position, he referred us to a number of previous decisions of Canadian courts and similar tribunals.

(It should be noted that such cases, including decisions of the Supreme Court, are not binding on this Commission, but may well provide assistance, and even be instructive, in our decision making.)

Counsel for the respondents argued for a strict interpretation of the Act, taking the position that the applicants could not be employers as there was no contract of employment between the applicants and the claimant. In fact, the claimant’s employment contract was with the employer corporation.

To find that an employment contract existed with the applicants, counsel argued, the Panel would have to “pierce the corporate veil”, i.e. completely disregard the separation which normally exists at law between a corporation and those who own or control the corporation.

Applicants’ Argument:

In 1914, the province of Ontario established the first workers compensation scheme in Canada. This followed the conclusion of a review conducted by Sir William Meredith, who set out the founding principles for the regime. Often referred to as the “Meredith Principles”, they continue to be the philosophical base for workers compensation.

Over the next few years, other provinces followed suit, introducing workers compensation programs modeled on both the Ontario legislation and the Meredith principles. In Manitoba, this occurred in 1916.

Paramount among these principles is the so-called “historic trade-off” whereby employers agreed to fund the scheme in exchange for injured workers giving up the right to sue their employers for negligence.

The applicants’ counsel argued that, to find directors not to be employers and, thus, liable to suit, would undermine this principle and threaten the integrity of the entire regime.

In support of this premise, he referred us to the comments of Justice Sopinka in the 1997 decision of Supreme Court of Canada, Pasiechnyk v. Saskatchewan (W.C.B.) (1997) 149 DLR (4^th) 577 (SCC), in which Sopinka provides the following overview of the history and purpose of workers compensation:

“Workers’ compensation is a system of compulsory no-fault mutual insurance administered by the state….

In Canada, the history of workers’ compensation begins with the report of the Honourable Sir William Ralph Meredith, one-time Chief Justice of Ontario, who in 1910 was appointed to study systems of workers’ compensation around the world and recommend a scheme for Ontario. He proposed compensating injured workers through an accident fund collected from industry and under the management of the state. His proposal was adopted in 1914. The other provinces soon followed suit….

“Sir William Meredith also proposed what has since become known as the “historic trade off” by which workers lost their cause of action against their employers but gained compensation that depends neither on the fault of the employer nor its ability to pay. Similarly, employers were forced to contribute to a mandatory insurance scheme but gained freedom from potentially crippling liability. ….

“I would add that this so-called negative feature is a necessary feature. The bar to actions against employers is central to the workers’ compensation scheme as Meredith conceived of it. It would be unfair to allow actions to proceed against employers where there was a chance of the injured worker’s obtaining greater compensation, and yet still force employers to contribute to a no-fault insurance scheme. ….”

Counsel asked us to adopt as a fundamental proposition: “...that this historic trade-off is central to the regime. It is not to be avoided or ignored. It is to be embraced and given full effect to (sic) as a necessary element of the plan.”

In considering this part of the submission, the Panelists came to a unanimous conclusion that the applicants were right on this point.

We adopt the following comments of Justice Sopinka:

“The bar to actions is not ancillary to this scheme but central to it. If there were no bar, then the integrity of the system would be compromised as employers sought to have their industries exempted from the requirement of paying premiums toward an insurance system that did not, in fact provide them with any insurance.”

We fear that the Board is playing fast and loose with this fundamental principle in finding loopholes in the legislation which, seemingly, allow the Board to initiate these actions in pursuit of redress from employers. Unfortunately, as will be described below, the majority of the Panel found that the current statutory and policy regime allows the Board to take these actions.

Applicants’ counsel asked us to adopt a second fundamental proposition: “…that the legislation is to be interpreted in a manner consistent with an approach that maximizes the scope of the no-fault regime and minimizes the opportunity for litigation arising out of workplace accidents as between persons connected to that workplace.”

Counsel argued that the Act is unclear and ambiguous in its definitions of “worker” and “employer”. As such, counsel submitted, it is open to, and incumbent upon, the Panel to interpret the legislation in a broad, inclusive manner. While this may well be an appropriate approach to statutory interpretation, the majority of the Panel does not find the Act to be unclear and ambiguous.

Counsel referred us to the 1987 Supreme Court decision in Kosmopoulos v. Constitution Insurance Co. of Canada et al (1987) 34 DLR (4th) 208 (SCC) as authority for his proposition that the Panel can and should adopt a broad and inclusive definition in this case.

In Kosmopoulos, the plaintiff had personally purchased insurance to cover physical assets owned by a corporation, of which he was the sole shareholder. The issue before the courts was whether or not Kosmopoulos held an “insurable interest” in the property. The Supreme Court chose to expand the definition of insurable interest, thus allowing Kosmopoulos to receive the insurance benefits.

Counsel suggested that, in like manner, the Panel could expand the definition of employer.

Counsel also offered us some other case law, which did follow the path he proposed, expanding the definition of employer.

Two of the cases referred to us were Berger v. Willowdale (supra) and Decision No. 516/87 (Dietrich v. Zimmer) [1987] 4 WCATR 210 (Ont. WCB Appeals Tribunal). Counsel noted that neither case dealt with the question of “executive officers” as “employers”. The Panel notes that, in both cases, the panels concluded that they were compelled by the plain language of the pre-1985 statute to find that executives were not protected from suit. (In 1985, the Ontario act was amended to specifically protect executive officer and directors from suit. While this amendment led to other problematic situations, they are not germane to our consideration.)

In Decision No. 304/87 (Routhier et al v. Vautour), 4 WCATR 134 (Ont. WCB Appeals Tribunal), the tribunal pierced the corporate veil finding that a director was, in that case, also an employer. However, in that case, the director was the president, sole shareholder and sole full-time employee of the corporation. The tribunal distinguished this case from Berger, as that case had dealt with a corporation which involved approximately 35 employers. For the same reasons, the majority, here, finds this case not to be relevant.

Reference was also made to a Saskatchewan case, Mantei v. Morris and Walker (1997) 9 WWR 203 (Sask. QB); (1998) SJ No. 170 (Sask. CA). This case involved two defendants who were sole shareholders and presidents of two small corporations. In response to a civil suit launched against them, they sought a ruling from the Saskatchewan WCB that the action was statute barred. They were successful. The board found them to be employers within the definition of the act.

There were a number of similarities to the case before us, including that neither Morris nor Walker had opted to buy the optional coverage for themselves. There were, also, differences, including that they were sole shareholders – here we have two joint shareholders; and both were actively engaged in the operations of their businesses – here, both were no longer working in the business at the time of the accident. However, those facts are not sufficient to distinguish Mantei from our case.

The majority found a significant distinction in the respective statutory regimes. The Saskatchewan act makes no mention of “directors”, either in its definition of workers or in respect of any provisions for optional coverage. In Manitoba, the Act is specific in both respects.

The majority found nothing in the case law provided to us that would compel us, in this case, to accept a broader definition of “employer” and accept directors as falling within the definition. We find the Act to be clear and unambiguous in establishing a distinction between employers and directors.

Subsections 74(3) and 74(4) are explicit in listing “employer” and “director” as separate entities. Given that changes made to the Act in 1992 had incorporated “executive officers” within the definition of “worker”, it would render these subsections meaningless were we to find that directors were covered by other provisions of the Act.

Accordingly, the majority concludes that “employer” and “director” are separate entities and that, in this case, the directors are not employers.

Do subsections 74(3) and 74(4) include immunity from suit?

It was argued before us that the “compensation” referred to in these subsections is limited to wage loss, medical and other benefits, to which an injured worker is entitled. It was never intended to include the immunity from suit provisions.

The majority would note two things in this regard. One, the subsections speak of bringing the employer or director within “the scope of this Part” of the Act. We note that among the benefits provided by “this Part” of the Act is the immunity from suit. Two, the board has chosen to interpret these subsections as including the immunity from suit. As noted elsewhere, while we feel that such an interpretation is not in the long-term best interests of the workers compensation regime, the majority finds nothing in the Act that would allow us to conclude that this interpretation is incorrect.

Respondents’ Arguments

Counsel for the respondents submitted that, for the Panel to find the applicants to be employers, we would have to “pierce the corporate veil”, that is, go behind the legal separation that exists between a corporation and its shareholders and directors. He submitted that this was not an appropriate case to do so. The majority of the Panel agreed with this submission.

In considering the concept of piercing the corporate veil, I would note the comments of the Presiding Officer in Appeal Commission Decision No. 40/01:

“The notion of ‘corporate veil’ historically finds its roots in the case of Salomon v. Salomon & Co. Ltd., [1897] A.C. 22 (H.L.). This case stands for the corporate law axiom that a corporation is a legal entity separate and apart from its shareholders. Incorporation is a legal fiction, which was developed to limit the personal liability of those that held shares in and operated a company. Modern corporate law has evolved over time to allow the creation of a company with only one shareholder, whereas formerly, a minimum of three shareholders was required. The legal effect of incorporating a company is to restrict a shareholder’s potential liability whether criminal, civil or contractual to that of the company’s. As a consequence, the concept of piercing the corporate veil arose out of a need for fairness and equity. In time, the courts would ignore or circumvent the shield of limited liability in those exceptional circumstances where it would be just and equitable to do so.”

Counsel referred us to an Ontario decision, Isaac v. Kripps (Decision No. 337/88), 10 WCATR 182, wherein the panel wrote:

“Incorporation creates “unreality”. Corporations are, by their very nature, artificial legal entities. By law, they are separate from those who create them or control them. This separation is what is referred to as the “corporate veil” – the veil separates the corporation and the business which belongs to the corporation from the corporation’s incorporators, directors or shareholders.

….

The corporation may have tax advantages or other advantages which result because the law treats the corporation as an entity which is separate from those who created or control the corporation.

Most importantly, the “veil” means the former sole proprietor or partner is not personally liable for contracts made on behalf of the corporation. Having created the veil and thereby been protected from personal liability for the corporation’s contracts, should the former sole proprietor or partner be able to say: ‘The contract of service of the worker in this business is with me. I am in reality the employer for the purposes of s.8(9) because nothing about my business has changed – the corporation merely masks me.’”

If we substitute the word “director” for “former sole proprietor or partner”, we have a situation very much the same as before us.

The leading authority on when to pierce the corporate veil is Kosmopoulos (supra). In that case, Madam Justice Wilson summarized the law as follows:

“As a general rule a corporation is a legal entity distinct from its shareholders: Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.) The law on when a court may disregard this principle by "lifting the corporate veil" and regarding the company as a mere "agent" or "puppet" of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the "separate entities" principle is not enforced when it would yield a result "too flagrantly opposed to justice, convenience or the interests of the Revenue": L. C. B. Gower, Modern Company Law (4th ed. 1979), at p. 112. I have no doubt that theoretically the veil could be lifted in this case to do justice, as was done in American Indemnity Co. v. Southern Missionary College, supra, cited by the Court of Appeal of Ontario. But a number of factors lead me to think it would be unwise to do so.

There is a persuasive argument that "those who have chosen the benefits of incorporation must bear the corresponding burdens, so that if the veil is to be lifted at all that should only be done in the interests of third parties who would otherwise suffer as a result of that choice": Gower, supra, at p. 138. Mr. Kosmopoulos was advised by a competent solicitor to incorporate his business in order to protect his personal assets and there is nothing in the evidence to indicate that his decision to secure the benefits of incorporation was not a genuine one. Having chosen to receive the benefits of incorporation, he should not be allowed to escape its burdens. He should not be permitted to "blow hot and cold" at the same time.

…In addition, it is my view that if the application of a rule leads to harsh justice, the proper course to follow is to examine the rule itself rather than affirm it and attempt to ameliorate its ill effects on a case-by-case basis.”

In Kosmopoulos, Justice Wilson chose not to pierce the corporate veil. In like manner, the majority finds piercing the veil not to be an appropriate action in this case. In reviewing Canadian case law as to when courts will pierce the corporate veil, it becomes clear that courts are very reluctant to use this tool. When they do, it is used as a “sword”, not a “shield”.

As a sword, it is usually used to protect third parties from a flagrantly unjust result. In such cases, the corporation is often a “sham” created to subvert contractual relationships or statutory obligations or to commit a fraud.

In the case before us, the directors would use piercing the veil as a shield to protect them. In Isaac (supra), the tribunal addressed this very point:

“In this case, the person asking for the lifting of the veil is the person who created it. The corporation which he created at law is not a sham. The corporation is not being used to subvert contractual relations. It carries on the business….

There is, in our view, no reason why Mr. Isaac should be permitted to “lift the veil” which he created when he incorporated the business. The act of incorporating has both advantages and disadvantages….”

As noted above, Justice Wilson wrote that one must accept both the benefits and the burdens of incorporation.

We were not presented with any authority, in which courts accepted the use of “piercing the veil” as a shield. We were presented with some tribunal decisions in which such practice was followed, notably from the Ontario WCAT, as well as the minority decision of this commission, in Decision No. 40/01.

The majority, in this case, is of the view, that these were not appropriate cases in which to pierce the veil. Based on a review of the evidence and case law presented to us, we conclude that the case before us is, also, not an appropriate one for piercing the veil.

In Kosmopoulos, rather than pierce the veil, Justice Wilson chose to pursue another route to find in his favour. She expanded the definition of what is considered to be an “insurable interest”. We also pursued the same, alternate route – expanding the definition of “employer” – but, as noted above, did not find the basis to do so, in this case.

There was, also, some deliberation/consideration – especially among the Panelists – on the particular nature of this case. While the applicants are directors of the accident employer, they are not shareholders in it. Each is the single shareholder in his own holding company. The holding companies, in turn, own the shares in the accident employer.

Does this fact have any impact on piercing the veil?

Following some consideration, we concluded that this situation was not germane to the case before us. We did not need to consider the ownership structure of the employer corporation. What was relevant to us is the applicants’ roles as directors of the employer corporation, not their roles as shareholders.

Q #3 - Is a corporate director a third party as contemplated in subsection 9(1)?

In response to the questions as to whether the applicants in this case are workers or employers, we have concluded that they are not. Given this, it is open to the board to consider them to be third parties and, thus, open to suit, pursuant to subsection 9(1) of the Act.

The Real Merits and Justice of the Case

It was argued before us that, in coming to our decision, we should consider the real merits and justice of the case. Argument was made that the directors before us are being accorded unequal treatment by the WCB. It was noted that the board has initiated such actions in only three cases, and that prior to 1997, it had never taken such action. Counsel for the applicants submitted that to ensure the ongoing fairness and integrity of the compensation regime, we should find that the actions are statute-barred.

It was also alleged that the board had magnified this unfairness by the way it hadn’t communicated to the employer community that special coverage included immunity from suit for corporate directors.

In reviewing this matter, we noted that it was not until October 1997 that the WCB first communicated to the general employer community an expanded interpretation of special coverage for directors as also providing immunity to suit. (A search of organizational records by the board found no prior communication of this expanded definition to the general employer community.) Even at that time, the communication about liability for suit was not provided directly to all employers. From 1997 to 1999, the Employer Guide referred to an optional fact sheet on special coverage that employers could request if interested in special coverage for their directors. This fact sheet provided the details regarding directors’ immunity from suit. The first inclusion in the general Employers Guide directly, of the immunity to suit issue for directors, was for the year 2000.

While we have sympathy for this argument, we are of the view that we do not have the jurisdiction to deal with it. In our view, the remedy requested in this situation amounts to equitable relief, which can only be granted by a superior court. As an inferior tribunal, we have no choice but to reject this argument.

Conclusion

The majority of the Panel has come to the following conclusions to the questions we set out near the beginning of these reasons:

1. Are the directors “workers”, as defined in subsections 1(1) and 1(3) of the Act?

No.

2. Are the directors “employers”, as defined in subsection 1(1) of the Act?

No.

3. Is a corporate director a third party as contemplated in subsection 9(1)?

Yes.

Given these conclusions, it is our final conclusion that the actions brought by the Plaintiff/Respondent against the Defendants/Applicants are not barred by the Act from proceeding.

Panel Members

T. Sargeant, Presiding Officer
P. Challoner, Commissioner
C. Monk, Commissioner

Recording Secretary, B. Miller

T. Sargeant - Presiding Officer
(on behalf of the panel)

Signed at Winnipeg this 4th day of March, 2002