Not all directors sit around mahogany tables in 80th floor board rooms. Most are small business owners who have incorporated their business at one time or another. When these small businesses fail, the directors, who are often also owners, need to understand their personal liability.
If a corporation issues dividends or redeems shares while insolvent, or the issuance or redemption causes the corporation to become insolvent then directors may be held personally liable for the the amount of the dividends or redemption.
When approving a dividend or share redemption as a director always ensure that the company is solvent and can afford the transaction. If you are uncertain, and disagree with the transaction then be sure to have your dissent noted in the directors’ meeting minutes.
Directors are personally liable for payroll source deductions owed to the Canada Revenue Agency (CRA). This includes income tax, E.I, and C.P.P. plus interest and penalties.
Directors are liable for HST owed to the CRA by the corporation.
If a director approves the transfer of corporate assets for less than fair market value, then that director is personally liable in the event that a creditor satisfies the court that the transaction was made to their detriment.
Directors can be personally convicted of the bankruptcy offences outlined in section 198 of the Bankruptcy and Insolvency Act if party to a bankruptcy offence perpetrated by the corporation. If convicted, the director can be held personally liable for any related damages.
Directors are not personally liable for unpaid corporate income taxes. In addition, corporate taxes are not usually owed by insolvent companies due to their lack of profitability.
Section 81 of the Employment Standards Act of Ontario holds directors of corporations personally liable for up to six months of unpaid wages and one year of unpaid vacation for each employee. This liability is enforced through the Ministry of Labour who will issue Orders to Pay.
D&O Insurance, as it’s often called, insures directors and officers against personal loss as a result of their service to the corporation. That said, most D&O policies have numerous exclusions, and do not afford protection to directors for their own negligence or willful neglect.
Creditors must first seek judgment against the corporation, and be unsuccessful in collecting against that judgment before they are able to pursue directors personally. If the corporation becomes bankrupt, and the CRA does not prove their claim within 6 months of the date of bankruptcy than the CRA forfeits its ability to pursue directors personally. Furthermore, if the CRA fails to pursue a director within two years of their resignation from the board of directors then they similarly forfeit their ability to pursue directors personally.
The two most common ways to limit liability are:
1) Due Diligence. Directors performing a high degree of care in their fulfillment of their duties can sometimes successfully defend against personally liability. When acting as director of a corporation during a challenging financial situation it is critically important to exercise a high degree of care, seek professional advice, and ensure adherence with federal and provincial legislation to limit liability.
2) Resign. Directors are often, but not always, able to avoid personal liability for debts incurred subsequent to their resignation. Before resigning, professional legal advice should be sought.
Seek professional advice if you are a director of a corporation that is struggling financially. The earlier that you understand your potential liabilities the more able you are to contain them.
Always do what’s best for the corporation with a view to all stakeholders. Acting in your own personal self interest can result in additional liability.
Understand that bankruptcy or a consumer proposal can provide relief from all forms of director’s liability and that the first step is having a free initial consultation with a licensed Trustee in Bankruptcy like the professionals at Welker and Company. Get the facts, and understand your options so that you can make an informed decision about your unique personal situation. Call today.