Directors' Liability: Execution Against Primary Debtor
In Barrett (2012 FCA 33), the minister sought to enforce a GST assessment against a director in his personal capacity. On the basis of the wording of the statute and case law, the FCA concluded that the minister is not obliged to make "reasonable" efforts to collect a GST debt from a corporation before he takes action against any director. The minister need only act in good faith.
Mr. B was a director of a corporation that had failed to remit GST for a period in the 1990s. The corporation ceased to carry on business, and Mr. B withdrew funds from the corporate account for his personal use. The minister registered a certificate in the FC in 1998 against the corporation and immediately obtained a writ of seizure and sale, which in 2000 he directed the sheriff to execute. The sheriff returned a nulla bona report to the minister. In 2002, the minister assessed Mr. B in his personal capacity in order to satisfy the corporate GST debt.
The TCC (2010 TCC 298) concluded that the minister's efforts to collect the GST debt from the corporation were relevant to the question of whether reasonable efforts were made to execute the writ. The court relied on its earlier comments in Miotto (2008 TCC 128) to conclude that in determining whether reasonable efforts were made, one must examine the entire execution process, including the steps the CRA took to search for assets and instruct the sheriff. The TCC said that because the minister failed to search for the corporate bank account, he had not made reasonable efforts to execute the writ against the corporation before he initiated action against the director. Thus, the court held that the requirements of ETA paragraph 323(2)(a) were not met, and it vacated the assessment against Mr. B.
ETA paragraph 323(2)(a) provides that before the director of a corporation can be held liable for its GST debt, a certificate for the liability's amount must be registered in the FC and the execution for that amount must be returned partially or wholly unsatisfied. On the appeal in Barrett, the FCA said that there was nothing in the provision's text that requires the minister to take reasonable steps to search for corporate assets before seeking to execute a writ. Instead, the FCA said that the rules of the federal court that issued the writ will establish the standards that govern the writ's execution.
The FCA then considered the FC rules and concluded that nothing in those rules requires a judgment creditor to make reasonable efforts to search for assets before instructing the sheriff to seek to collect the debt. The FCA acknowledged that the rules are complemented by provincial execution laws regarding writs, but said that nothing in the Ontario statutes or the rules of civil procedure requires a judgment creditor to make reasonable efforts to search for assets.
Thus, the FCA also considered the legal context and purpose of ETA paragraph 323(2)(a) and concluded that none of the administration or enforcement provisions of the ETA assist in ascertaining whether the minister must make reasonable efforts to search for corporate assets. Instead, those provisions confirm that a director's liability arises not merely from an ordinary debt, but from an obligation in respect of money collected from third parties and held in trust for the government of Canada. A director has the power to ensure that a corporation makes its remittances, but he can exculpate himself from personal liability if he can demonstrate his due diligence. Nothing in the relationship between a corporation and its directors is consistent with the proposition that the minister must take reasonable steps to search for the corporation's assets before taking action against directors. This is particularly so in cases where the director can be indemnified from existing corporate assets: a director who has been held liable for a GST debt has the same preferential rights as the minister over other creditors to be indemnified through the corporation's remaining assets.
The FCA also examined whether the trial judge concluded correctly that Miotto imposed a burden on the minister to make reasonable efforts to locate the corporation's assets and direct the sheriff accordingly. The TCC in Barrett had relied on an excerpt from Miotto that referred to the CRA's reasonable belief that the primary debtor had no assets, but immediately went on to say that the "execution of a writ . . . requires reasonable efforts on the part of the bailiff. It does not require perfection." The FCA said that further comments in Miotto--concerning the CRA collection officer's reasonable belief and the inappropriateness of the directors' criticizing the CRA for failing to find items that they had hidden--pointed to a simple good faith requirement on the minister's part.
Thus, the FCA concluded that the TCC had erred in finding that ETA paragraph 323(2)(a) imposed an obligation on the minister to make reasonable efforts when directing the sheriff and searching for corporate assets. At the most, the minister's obligation in seeking to execute a writ is to act in good faith. As the FCA suggested concerning the directors who spirited away assets in Miotto, it is difficult to sympathize with Mr. B's attempt to exculpate himself from personal liability as a director by criticizing the minister for not finding the money (before Mr. B spent it) that had been held in trust for the Crown in the corporation's bank account.
John Sorensen and Steve Novoselac
|Canadian Tax Highlights |
Volume 20, Number 3, March 2012
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Sunday, March 25, 2012
Posted by Daniel Katev at 10:15 PM