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We have previously discussed the director’s liability (QuebecOntario). But what options are available to limit their liability?

Here are possible solutions for six types of responsibilities that may be placed on the director of an insolvent company.

1- Fiscal liability of directors

This responsibility is a result of tax law. It includes situations in which the company fails to pay amounts owed for GST/HST, QST, and source deductions. In Quebec, amounts owed to the CNESST must also be included. In Ontario, outstanding amounts for WSIB and Employer Health Tax may also be claimed against the director of an insolvent company.

2- Receipt of a notice of personal assessment for the company’s debts

The director can choose to personally contest the notice within the timeframe allowed by law. Normally, the deadline is 90 days following receipt of the notice.

If the director does not contest the notice within the prescribed deadline, the assessment is enforceable against the director.

3- Secured creditors of the company and joint loans with the company or surety bonds

The director is allowed to contact the creditor holding the security. He or she can attempt to make an agreement to safeguard property belonging to the company and for which the director is a co-borrower or guarantor.

However, any agreement is subject to the rights of the Licensed Insolvency Trustee (LIT) administering the company’s bankruptcy, if it has occurred. It also requires the creditor’s acceptance.

4- Surety bonds of different company loans

Directors may be required to pay and reimburse loans they guaranteed in the company’s name by contract or at the time of account applications with creditors. If they wish to, directors can make an arrangement with these creditors for their personal liability.

5- Responsibilities as an employer

Under the provincial and federal incorporating statutes for companies, including but not limited to the Canada Business Corporations Act, directors are jointly and severally liable for debts relating to unpaid employee wages for up to six months’ salary. The director’s liability is incurred if the execution of the claim against the company cannot be completed or if the debt was established within the first six months following the start of the company’s liquidation or dissolution proceedings or the company’s bankruptcy.

In Ontario, the Employment Standards Act (2000) allows employees to sue their employer even before possible recourse against the company is exhausted.

6- Claims by a Licensed Insolvency Trustee or tax authority to pay dividends to a shareholder or director or an advance made by the company

During a company’s insolvency or bankruptcy, all dividends paid and share buybacks made in the period preceding bankruptcy can be claimed from a shareholder or company director. The latter must prove to the claimant that the dividend or buyback did not cause the company’s insolvency or bankruptcy, and failing that, must enter into a repayment agreement. Furthermore, if the company advanced sums to the director as an advance, he or she may be asked to repay it.

Remember that tax authorities can assess the shareholder or director personally.

Obtain expert advice

We strongly recommend that, for any of the situations listed above (1 to 6), the director consult a professional. A legal adviser or lawyer, an accountant, or a tax expert can explain available options. We also strongly recommend seeking the opinion of a professional before entering into agreements, making payments, or assuming a company’s debt in your own name.

Despite everything, directors of insolvent companies are often financially incapable of considering the above-mentioned solutions. In these cases, we can help directors by proposing solutions provided by the Bankruptcy and Insolvency Act (BIA).

Our solutions to help directors

Proposal

For companies, a proposal is an option before declaring bankruptcy.

A proposal offers an advantage for directors based on section 50(13) of the BIA, which allows them to compromise with creditors for claims against them. However, these claims cannot be of a contractual nature or for oppressive or fraudulent conduct.

In most cases, compromising with creditors allows the director to settle tax claims made to them personally.

Additionally, if the proposal is ratified by the court and if it provides for the settlement of employee salaries, the director’s responsibility toward those employees is resolved.

Consumer proposals

A consumer proposal allows directors to pay obligatory debts while protecting themselves against seizure. It can also include their personal debts and allows them to submit an offer to their creditors that respects their ability to pay their debts. The consumer proposal also allows them to keep their property.

Conversely, they will not be protected from and cannot settle debts arising from fraudulent conduct, as well as other exceptions listed in section 178 of the BIA.

Bankruptcy

In cases where a proposal is impossible or is rejected by creditors, directors can file for personal bankruptcy to be protected against certain seizures, prosecutions, or claims based on their personal liabilities as a director. They will also have to include their personal debt in this proceeding.

The LIT can inform them about which assets they can keep and which will be liquidated to pay their creditors. Like a consumer proposal, some debts cannot be included in bankruptcy, such as those arising from fraudulent conduct (section 178 of the BIA).

Be involved with your company to avoid nasty surprises

Starting a company has many responsibilities and can implicate directors personally. Of course, there are many advantages to incorporating a company. However, remember that this does not protect directors against all creditor recourse.

  1. Financial institutions require the personal commitment of directors in most cases
  2. Tax authorities have created laws to hold directors accountable for the failure of their company to respect its fiduciary obligations

It is therefore essential to be well informed when creating a company, during its operation, and if and when financial problems arise.

Becoming informed with the help of qualified professionals, and remaining personally involved with your company to verify its operational and account management are good habits to adopt. Above all, don’t blindly trust others to manage the company.

If you have any questions, whether about company directors’ responsibilities or any other subject related to insolvency, we would be pleased to answer them. Contact us today.

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