In Alberta, directors of a corporation can be held personally liable for certain debts of the corporation in the event of bankruptcy or otherwise. This is because a director has a legal responsibility to ensure that a corporation is able to pay its debts as they become due and to ensure the corporation has sufficient liquid assets to satisfy these obligations.
The liability of a director for the debts of a corporation can arise from a number of different sources, including those discussed below.
One of the most common debts for which directors may be held liable in bankruptcy is unpaid wages and other employment-related debts. Under the Employment Standards Code (Alberta), directors can be held personally liable for unpaid wages, vacation pay, and other entitlements of employees if the corporation is unable to pay these debts. Additionally, if a corporation has failed to make contributions to a pension plan or other employee benefit plan, the directors may be held liable for these debts in the event of bankruptcy.
Directors may also be held personally liable for unpaid GST (HST, where applicable) and/or any amounts the Corporation failed to remit or withhold for employee wages and benefits as required under the Income Tax Act, if the corporation is unable to pay these debts in the event of bankruptcy. This is because the Canada Revenue Agency (CRA) has the authority to pursue directors for these amounts under the Income Tax Act and the Excise Tax Act.
The Business Corporations Act (Alberta) also imposes personal liability on directors if a director votes or consents to a resolution of the corporation to purchase, issue, or redeem shares or dividends, or for the corporation to provide financial assistance to a shareholder, affiliate, or other director when the corporation is not solvent or has insufficient liquid assets. In those cases, a director may be obligated to pay that money back to the corporation, whether they benefited from the transaction, or simply voted in favor of it to benefit another person.
Directors may also be held personally liable for any debts incurred by the corporation if they have given personal guarantees or other indemnities, or if the director has personally guaranteed or otherwise indemnified any loans or other obligations of the corporation.
Bad Faith and Misconduct
A director may also be held personally liable if the corporation is found to have engaged in fraud or misappropriation of funds. In these cases, the director may be held liable for any damages suffered by shareholders or creditors as a result of the fraud or misappropriation.
A director may also be held personally liable if the director causes the corporation to transfer assets or incur liabilities with the intent to defraud or defeat other creditors.
Additionally, a director can be held liable if they act in bad faith or breach their duty of care and loyalty to the corporation. For example, if a director makes a decision that harms the corporation, and it can be proven that the decision was made with knowledge that it would harm the corporation, the director may be held liable for damages.
To prevent being personally liable as a director for the debts or other obligations of a corporation, it is important for directors to always act in the best interests of the corporation and to exercise due care and diligence in making decisions on behalf of the corporation. It is also important for directors to ensure that the corporation maintains proper financial records, and to ensure that the corporation complies with all applicable laws and regulations, including those related to employment standards and taxes–this includes filing annual returns, meeting all tax obligations and ensuring that the corporation is in good standing with the Alberta Corporate Registry.
Directors should be aware of their obligations under the Bankruptcy and Insolvency Act their obligations under the Business Corporations Act, and under other relevant laws and regulations. If you have questions or concerns about your rights, obligations, or other duties as a director of a corporation, or whether your corporation’s business practices comply with applicable laws and regulations, please contact McCuaig Desrochers LLP’s Business Law Practice Group for guidance and assistance.
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This article was written by Jeff Arsenault.