When Could Directors Be Held Personally Liable? LEGISLATIVE SOURCES OF PERSONAL LIABILITY Federal laws prescribe a number of situations in which directors may be held personally liable when the corporation becomes insolvent – for example:
Directors should be aware of the potential liabilities associated with their positions and how these liabilities relate to their directors and officers (D&O) insurance or corporate indemnity agreements. Proving that a director exercised due diligence may exonerate them of some, but not all, types of statutory personal liability arising in the context of corporate financial distress. their positions and how these liabilities relate to their directors and officers (D&O) insurance or corporate indemnity agreements. Directors should be aware of the potential liabilities associated with
– unpaid wages up to six months; 36 – unpaid source deductions for taxes; 37
– unpaid Canada Pension Plan premiums, plus interest; 38 – unpaid Employment Insurance premiums, plus interest and penalties; 39 – unpaid GST/HST, plus interest and penalties; 40 – up to $10,000 for bankruptcy offences if convicted and indicted; 41 and – unusual incentive payments or benefits made within the past year when the corporation was insolvent. 42 Provincial laws typically cover areas such as employment, health and safety, and environmental obligations, and may also result in personal liability for directors. For instance, directors in Ontario could be convicted if they fail to inform the provincial Ministry of the Environment about a contaminant being discharged. 43 Other liabilities may also apply, depending on whether provincial employment laws or the Canada Labour Code 44 apply, or whether the corporation is publicly traded. For example, directors of publicly traded issuers may face liabilities related to their obligations under securities laws, such as failing to comply with ongoing and periodic disclosure requirements by not appropriately communicating a change to share buyback programs. 45 Other liabilities may arise if a director allows the issuer to violate the law or its obligations, or if the director trades in the issuer’s shares on the basis of important information that is not generally available to the public. 46
PROTECTIONS AGAINST PERSONAL LIABILITY
When an issuer begins entering the “zone” or “vicinity” of insolvency, directors should not only remind themselves of the scope of their personal liability, but also of the protections available to them. These protections will generally take one of three possible forms – an indemnity from the issuer, an indemnity trust fund, or D&O insurance. Since there is no bright-line rule to identify when a corporation has entered the zone of insolvency, directors should look to the corporation’s capacity to satisfy its liabilities as they come due, the availability of external funding, and the balances of the corporation’s credit facilities as indicators of potential financial distress.
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Governance Insights 2020
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