Directors’ Liability in Uncertain Economic Conditions
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Often corporate liabilities do not personally attach to the directors of that corporation. However, there are certain exceptions to this rule that corporate directors should be aware of. Some of those exceptions, such as director liability for unpaid wages, are particularly relevant given the current economic hardships and COVID-19 pandemic.
Below are a few highlights relating to the significance of director liability and circumstances where it can arise. This blog is for general information purposes only and does not represent legal advice. If you suspect that any of these situations could apply to you, we recommend that you contact a lawyer to resolve any questions you may have regarding directors’ liability.
Personal vs Corporate Liability
The distinction between corporate and personal liability is critical. Legally, corporations are distinct entities. Just as you are not responsible for the debts of your neighbour, in general, you are not personally liable for the debts of a company (even if you are a shareholder or director).
Notwithstanding that general rule, directors exercise control over the corporation’s actions and make the decisions that affect third parties dealing with the corporation – like customers, suppliers, government agencies like CRA, contractors and employees. With that control comes the possibility that a director could be personally liable for some of the debts or wrongful actions of the corporation. If a director is personally liable, then he or she may be subject to enforcement measures such as garnishment or the seizure of personal property, including automobiles and recreational vehicles.
Some examples of situations where a director may be personally liable for the debts of a corporation include:
- Business transactions that continue after a director knew or should have known that the corporation was insolvent;
- Liability for environmental damage or costs caused by the corporation;
- Unpaid source deductions like income tax, EI premiums and CPP contributions;
- Unremitted corporate GST;
- Occupational Health and Safety fines and even prison sentences; and
- Unpaid wages, vacation pay and potentially benefit and pension plan contributions, discussed further below.
As mentioned above, one situation particularly relevant in the face of COVID-19 business interruptions and shutdowns is when a company fails to meet its payroll obligations. The Alberta Business Corporations Act and Alberta’s Employment Standards Code both provide that directors may be liable for up to 6 months unpaid wages under certain circumstances, including the bankruptcy of the corporation.
The rationale for this is that employees don’t know a corporation’s real financial state while directors do. As such, employees rely on the judgment and good faith of a company’s directors to ensure that they will get paid for their work.
Directors may also be liable if the corporation fails to remit employee payroll deductions such as CPP, EI and income tax. Accordingly, it is incumbent on them to monitor the payroll process carefully.
Resigning as a director does not necessarily mean that you will escape liability. However, directors are typically not liable for issues that arise AFTER their resignation. This means it is crucial, particularly in difficult economic times, that the hiring and termination of directors is recorded in corporate records so that the timing of events can be established.
In tough economic times, corporate directors have a greater than normal risk of personal liability. This makes it more important than ever for directors to obtain proper financial and legal advice and to keep adequate corporate records.
Should you have questions or concerns about this topic or others, please contact KMSC Law to book a consultation.