When are directors liable to employees for debts of the corporation?
It is an accepted principle of corporate law that the owners or managers of a corporation are not legally liable personally for the debts of that corporation. However, since the inception of limited liability, corporations have sought to avoid payment of various debts by hiding behind what is referred to as the “corporate veil”. Some of these efforts have been so flagrant a misuse of the principle that courts have struggled to “pierce the corporate veil” and impose legal liability on directors of the corporation for certain conduct.
In addition, the legislatures of various provinces have also sought to impose liability on corporate directors in specific circumstances largely related to liabilities to employees. For example, directors of Ontario corporations may be personally liable for unremitted source deductions earned by unpaid wages, vacation pay and unpaid commissions. Section 31 of the Ontario Business Corporations Act provides that all directors of a corporation are jointly and severally liable to its employees for all debts not exceeding six months’ wages that arise while they are directors. While the liability is primarily that of the corporation, the issue generally arises when the corporation is insolvent and cannot make payment.
Directors may also be liable for unremitted Employment Insurance Act premiums, and Canada Pension Plan contributions. For liabilities owed to the Canada Revenue Agency (CRA), the agency must first demonstrate that it is unable to collect the amounts at issue from the corporation. The director may defend a claim by the CRA on the basis that he exercised due diligence and care in his efforts to prevent the inability to make the remittance in question. Directors can take some comfort from the fact that actions against them for wages must be commenced while they are still a director or within two years of their resignation.
In addition to liability for unpaid remittances, directors are liable to quasi-criminal charges as a result of their actions as a director. For example, under the Employment Insurance Act, a director or officer who participated in providing false or misleading information to HRDC may be found guilty of an offence and subject to a fine. The director could defend the claim by proving that she exercised the amount of care and attention which a reasonably prudent person would have exercised in comparable circumstances.
Persons who agree to act as directors of corporations should ensure there is an adequate amount of directors’ liability insurance in place to protect them from these types of liabilities.
Garfinkle, Biderman LLP