How liability exposure goes up for directors and officers in tough times

Generally speaking, corporations are considered separate legal entities, and the individuals who run those entities are insulated from personal liability for the corporation's actions or omissions. However, when economic conditions challenge the solvency of those corporations, directors and officers need to be aware of exceptions where federal or provincial legislation may make them personally liable. One such exception is in respect of liabilities regarding the payment of the corporation's employees.

Employment-related duties and liabilities

Wage liabilities

Unpaid wages present a significant area of potential liability for directors. The Business Corporations Act (Alberta) (ABCA), the Canada Business Corporations Act (CBCA), and Alberta's Employment Standards Code provide that directors of a corporation are individually and collectively liable to employees for up to six months' wages that become payable to employees for services performed while they are directors.

Under the code, "wages" includes salary, pay, money paid for time off instead of overtime pay, commission or remuneration for work, but importantly do not include overtime pay, vacation pay, holiday pay, termination pay, discretionary bonus pay (not based on performance), expenses, or tips and gratuities.

A director will only be liable under the ABCA and CBCA if:

(a) The employee sues for the "wages" within six months after they become due and the employee is not able to collect in whole or in part from the corporation;

(b) The corporation has commenced liquidation or dissolution proceedings or has been dissolved and the wages have been proven within six months after the commencing of liquidation and dissolution proceedings or the date of dissolution;

(c) An assignment in bankruptcy or a receiving order has been made under the Bankruptcy and Insolvency Act (Canada) and the wages claim has been proven within six months after the date of the assignment or receiving order.

The limitation period for proceeding against a director is two years after he or she has ceased to be a director. There is no requirement for the corporation to be joined in the proceeding against the director.

The CBCA, unlike the ABCA, provides that director is not liable if they exercised the requisite due diligence in the circumstances. This includes reliance in good faith on financial statements or a report of a credible professional person.

Deduction and remittance liabilities

Directors can also be individually and collectively liable (together with the corporation) where an employer fails to deduct and remit the amounts required for the employees' pensions plus any interest and penalties relating to the unremitted amount under the Canada Pension Plan. In addition, where a corporation is guilty of an offence under the Canada Pension Plan, every director who authorized or acquiesced or participated in the offence is liable to the punishment, whether or not the corporation has been prosecuted or convicted. The limitation period for proceeding against the directors is five years from the time the event occurred.

The Employment Insurance Act provides similar liability for directors, together with the corporation, for the failure to deduct and remit required employment insurance premiums. Tougher yet, where a corporation is guilty of an offence under the Employment Insurance Act, every director who authorized, acquiesced in or participated in the offence is liable to the punishment, whether or not the corporation has been prosecuted or convicted. An information or complaint for such an offence by a director must be made within five years after the subject matter of the information or complaint arose.

The Income Tax Act provides that directors are individually and collectively liable, together with the corporation, for a failure to withhold and remit income tax deductions and goods and services tax. However, a director will not be liable to pay the unremitted amount (together with interest and penalties) where he or she exercised the requisite due diligence to attempt to prevent the failure.

Since the liability of the directors is individual and collective, a director who has satisfied a claim for the unremitted amount may obtain contribution from other directors who are liable under the claim.

The "due diligence defence"

Directors may be relieved of some of these liabilities where they have relied (in good faith) on corporate financial statements and reports. Directors are said to have acted with due diligence if they exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances.

The court cases that have considered the application of the "due diligence" defence highlight that there are both subjective and objective elements to the defence and, as such, the cases tend to turn on their individual facts. In general, the courts consider the personal attributes of the individual director, including the individual's education, business experience and general ability as well as the size, nature and complexity of the business and its customs and practices. In a leading case, the court noted that generally a person who is experienced in financial and business matters will be held to a higher standard than a person with no business acumen or experience. It is due to this inherent flexibility of the due diligence defence that a higher standard may be imposed on some directors.

"Inside" directors who are involved in the day-to-day management of the company and who influence the conduct of its business affairs are subject to a higher standard than "outside" directors who are not involved on a day-to-day basis.

Regardless of individual attributes, the most important factor in establishing a due diligence defence is the actions taken by the director to ensure that the proper amounts are deducted and remitted. An indication of the types of actions required to meet the due diligence standard can be found in the Canada Customs and Revenue Agency Information Circular IC 89-2R :

(a) Establishing a separate account for withholdings from employees and remittances of source deductions;

(b) Calling upon financial officers of the corporation to report regularly on the status of the account; and

(c) Obtaining regular confirmation that withholdings, remittances and payments have in fact been made during all relevant periods.

If the corporation is experiencing financial difficulties, the Information Circular suggests the directors may have additional responsibilities, including, if the corporation is in receivership or is bankrupt, advising the receiver and manager or trustee in writing of the banking arrangements in place for the payment of the source deductions withheld.

Pension duties and liabilities

Another potential area of liability for directors is under the Employee Pension Plans Act (EPPA), which requires the administrator of the pension plan to exercise the care, diligence and skill that a person of ordinary prudence would exercise in dealing with the property of another person. The administrator must act honestly, in good faith and in the best interests of the members.

The penalties for contravening the EPPA are quasi-criminal in nature and include a fine of up to $100,000. The limitation period under the EPPA is three years after the superintendent first had knowledge of the facts on which the prosecution is based.


Canadian legislation imposes heavy burdens and potential liabilities for the directors of a corporation that fails to meet its payroll obligations (both in wage payment, and in withholdings and remittances). It is essential for directors to be aware of their obligations, and the significant personal liability that can occur if those obligations are not met. This becomes all the more germane during periods of economic difficulty, where the possibility a corporation becoming insolvent increases significantly.

Carole Hunter is a partner in BD&P's restructuring and insolvency group.

Gina Ross is a partner in BD&P's employment and labour group.